Was the Volcker Rule bad for bond market liquidity?

"With regard to intended effects, we find no statistical evidence that the Volcker rule reduced dealer risk-taking as measured by the standard deviation of covered dealers' corporate bond trading returns. Rather, our analysis suggests that covered firms' risk-taking has experienced an increase on short-term trades. Given the short time in inventory, some or most of these transactions could more easily qualify for the rule's market making exemption. Longer-term trading activity of covered firms, which we would expect to face more scrutiny under the rule, shows no statistically significant change in risk-taking, although the coefficients are in the direction of lower risk.

"As for unintended consequences on corporate bond market liquidity, we find evidence that the rule has increased the markups Volcker-covered dealers charge their clients even on trades that we would anticipate would qualify for the rule's market making exemption. Specifically, we find that Volcker-covered firms are charging 20-45 basis points higher markups when conducting short-term trades, i.e., roundtrip trades under 15 minutes and roundtrip trades within one day. These findings are highly significant, both statistically and economically. While we would expect these transactions to be exempt, Volcker-covered dealers still appear to be charging customers a premium for these trades after the Volcker rule's implementation."

— Office of Financial Research