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Experts fear rise in trading costs will follow onset of Volcker rule 

August 10, 2015

Rick Baert, Pensions & Investments

The implementation of the Volcker rule last month is expected to accelerate the trend among institutional money managers to break up their block trades in fixed income, causing concern that the potential for information leakage and execution delays could increase, driving up trading costs.

The Volcker rule, a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that went into effect July 21, bans proprietary trading by banks and also makes holding inventory more expensive, including inventory in fixed income that institutional investors can buy. That rule, along with other regulations under Dodd-Frank and European banking rules under Basel III, led banks' trading desks to cut back on fixed-income inventory, a traditional source of liquidity in the fixed-income market.

As a result, managers — especially those looking to trade more than $5 million in bonds at once — are spending more time and money finding buyers and splitting up their block trades to do so. And the potential for rising interest rates could make that search for liquidity even more expensive.

Read more: Pensions & Investments

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