@dominicwolla

As compliance progresses, custody and insurance costs rise, shifting market-making economics. For custodians, insurance premiums scale with volatility and AUM, often increasing by 20–40% annually in high-risk phases. Market makers face reduced spreads due to higher operational costs, compressing profitability. To model impact, profitability scenarios can incorporate rising custody costs into net spread margins under various liquidity conditions. Long-term, this may consolidate liquidity among well-capitalized firms, as smaller desks struggle with margins. Thus, regulation not only adds costs but also reshapes market structure, favoring institutions with stronger capital reserves and risk infrastructure.

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