Does banking regulation impact the markets?  Matt Levine writes; . Since the Volcker Rule was just a glimmer in Paul Volcker’s eye, I have wondered when hedge funds and smaller independent investment banks would take over some of the market making businesses that regulation has made difficult for banks. The answer seems to be now. Or maybe “too late”:

In some respects, Citadel’s recent success has been a little like crashing a house party after the police have already busted it up.

Global banking rules intended to make the financial system safer have caused a retreat from the market in recent years. The total size of the credit-default swap market has shrunk to $12 trillion from $34 trillion in October 2008, according to DTCC data.

Broadly speaking, two things make it hard for newcomers to break into a financial market dominated by big banks. One is market structure: If people trade by calling their salespeople at the same three banks, it’s hard to get on their speed dial; if people trade by going to an exchange, it’s much easier to get a spot on the exchange. Much of the Citadel story is about its bitterly contested fight for more transparency, central clearing, electronic execution, etc. in the CDS market.

The other thing is balance sheet. Big banks have so much money. This has not stopped Citadel and other high-frequency trading firms from taking a lot of business from them in the stock market, because it turns out you don’t need that much money to trade a whole lot of stocks. (You just have to sell them quickly.) Traditionally, you need a lot of money to make markets in bonds or CDS, because you tend to hold on to them for a while. Central clearing of CDS helps with that problem, but even more helpful has just been a regulatory environment that negates the banks’ cash advantage. For all their money, banks can’t afford to hold on to trades any more than Citadel can.