Although it is a highly desirable feature for securities markets in order to thrive sufficient
liquidity is barely recognized when being present. This study analyzes often neglected market
liquidity in the corporate bond market after the introduction of comprehensive financial
regulation in the USA foremost associated with the Volcker Rule. Research identifies an
increasing share of customer liquidity provision to be a reason for an underestimation of
overall transaction costs as spreads charged by customers are lower compared to market-makers'
spreads. With customers providing liquidity where market-makers do not the overall spread
averages decrease. The author applies this research results to collateralized loan obligations
(CLOs) and the corporate bond market. This approach is new since it directly tests the growth
of liquidity provision by CLOs as non-Volcker affected vehicles replacing restricted
market-makers.
