Once upon a time banks were risk takers.

They were willing to quote vol on any niche asset that you want, trade any twisted vol product you like, and quote any crazy structure you fancy...

But then....

One day the evil regulator came and said "You need to stop taking so much

risk. Either you buffer yourselves or cut your risk limits substantially!"

And so they decided to choose the latter...

They stopped quoting most illiquid assets, and everything else they would just close at the broker... At that point they let go most of the big risk takers

on their trading floors (because why would you have a risk taker if you are just moving positions and not warehousing them?), and told buy-side clients "It was fun, but we cannot play anymore. find yourself someone else to play with..."

This fairytale may sounds stupid, but this is what has been happening to the market since 2008 GFC... banks just don't want to take part in anything that is not highly liquid, and even then they will go and offset the risk... They will not carry much risk overnight

This all relates to works of @vol_christopher and @choffstein about the vicious cycle of market microstructure, and to my latest piece about the dynamic of flash crashes. Every time the markets feel nervous, so are the risk teams at the banks, which make them take zero risk

and supply the market insurance and liquidity (I remember @Ksidiii talking about his risk limits at the banks, and that you cannot go above them no-matther-what)..

My point? this low risk limits is a fertile ground for volatility squeeze (in both directions), as banks are

trying to maintain their greeks very low... They will be squeezed on the move up in vol, and when the vol will start moving lower they will dump it in a fire-sale...

A good practitioner just needs to understand the mechanics of the market and the dealers target functions