I view proprietary trading as an activity of low or no real economic value that should not be part of any banking model that has an implicit government backstop.
First and foremost, it is traditional banking of the sort engaged in by community banks that promotes true liquidity in regions and within sectors, through deposit-taking and lending. Sure, liquidity in opaque financial markets may have increased in recent years by virtue of proprietary trading, but how has this market liquidity benefited consumers, retail investors, small business owners, and homeowners? Second, the Volcker Rule does not prohibit proprietary trading by all entities. Rather, it focuses solely on government-backstopped banks and their affiliates. Thus, even if federally insured banks are precluded from making markets, these markets can continue to be supported by conventional investment banks, hedge funds, and other financial market participants. Thus, any supposed impact by the Volcker Rule on overall market liquidity or credit spreads is, to me, questionable.
Moreover, much of this so-called liquidity, especially in opaque over-the-counter markets, is potentially illusory and destabilizing, especially during adverse market conditions, which does not benefit the public. Indeed, proprietary trading involves buying and selling purely for speculative purposes that have little to do with a true assessment of a financial position's underlying value. Price discovery actually is impeded by this hyper-liquidity that is introduced by such speculation. This hyper-liquidity, motivated by nothing more than expectations of short-term price movements, creates inefficient subsidies to buyers and sellers with no compelling public benefit.
I think that certain markets should feature large credit spreads because they involve truly risky products. Thus, a reduction in proprietary trading may have the effect of increasing spreads, but that is actually a public benefit, not a cost, because those wider spreads will more accurately reflect the risk involved in those positions.
All of this is to say that liquidity is not an inherent public benefit that justifies the expenditure of significant compliance, oversight, examination, and enforcement costs. In other words, certain capital market activities for federally insured banks should not be supported by vast amounts of public and private expenditure.