Stocks fell as investors reacted negatively to the adoption of the “Volcker rule”, which prohibits banks from proprietary trading.

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Paul Volcker

The major stock indices took hard falls on Wednesday, as investors pondered the future of a stock market without proprietary trading by banks. Most stocks were in the red on Wednesday, after the Federal Reserve and four financial regulatory agencies adopted the so-called “Volcker rule”, named after former Fed Chair, Paul Volcker.

Although Volcker was not personally involved in writing the 71-page document, it resulted from Volcker’s insistence that the 2010 Dodd-Frank Act should include prohibitions on proprietary trading by banks, to prevent those institutions from taking on excessive risks and causing another financial crisis.

The final version of the Volcker rule actually provides loopholes for the banks to engage in hedging and market-making trades. As a result, we can expect the megabanks to be employing plenty of lawyers to justify their prop trades as “market making” and “hedging”, once the rule takes effect in July of 2015.

From the investors’ perspective, the rule is bad news because the proprietary trading activities of the so-called “primary dealers” – the 21 financial institutions which are permitted to conduct transactions with the Federal Reserve – bring the flow of freshly-printed money from the quantitative easing program to the stock exchanges. With no prop trading allowed, the Fed could be purchasing $170 billion in Treasury securities and mortgage-backed securities every month (instead of the current $85 billion) and the money would still have no means of finding its way to the stock market to inflate prices.

Although the new rule does not take effect until July of 2015, any future quantitative easing program instituted after that point will have a drastically limited impact on the stock market. Six Commodity Charts that Argue Against Fed QE3 Tapering

The Dow Jones Industrial Average (NYSEARCA:DIA) lost 129 points to finish Wednesday’s trading session at 15,843 for a 0.81 percent decline. The S&P 500 (NYSEARCA:SPY) fell 1.13 percent to close at 1,782.

The Nasdaq 100 (NASDAQ:QQQ) dropped 1.29 percent to finish at 3,468. The Russell 2000 (NYSEARCA:IWM) sank 1.62 percent to end the day at 1,101. A Very Distinctively Negative Day

In other major markets, oil (NYSEARCA:USO) fell 0.93 percent to close at $34.98.

On London’s ICE Futures Europe Exchange, January futures for Brent crude oil advanced 29 cents (0.27 percent) to $109.42/bbl. (NYSEARCA:BNO).

February gold futures declined $9.40 (0.75 percent) to $1,251.70 per ounce (NYSEARCA:GLD).

Transports slid off the road on Wednesday, as the Dow Jones Transportation Average (NYSEARCA:IYT) fell 1.61 percent.

In Japan, stocks declined as the yen gained strength. A stronger yen causes Japanese exports to be less competitively priced in foreign markets. The yen climbed to 102.59 per dollar during Wednesday’s trading session in Tokyo. (NYSEARCA:FXY). As short-sellers of the currency were being squeezed, a “double-bottom” appeared on most of the yen forex charts, signaling an imminent rise and attracting buyers. Mazda shares sank 1.04 percent on the Tokyo Stock Exchange. The Nikkei 225 Stock Average declined 0.62 percent to 15,515 (NYSEARCA:EWJ).

Stocks took a hard fall in China on widespread concern that the nation will lower its 2014 economic growth target from 7.5 percent to 7.0 percent. Coal mining stocks were particularly hard-hit after the National Development and Reform Commission announced that the nation will institute regional coal consumption control plans to address the nation’s smog problem. The Shanghai Composite Index sank 1.49 percent to 2,204 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index fell 1.71 percent to end the day at 23,338 (NYSEARCA:EWH).

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