> The Volcker Rule (part of Dodd-Frank) prohibits prop trading at banks (with few exceptions).
Ok, replace prop trading with a fund trading OTC products that the bank runs.
> All these trades still need to be cleared, no? There's a structure to markets that you're papering over here.
They do, and as I wrote in a bit that you didn't quote, it's largely irrelevant because it's not that difficult to hide collusion. Heck, the guys fixing LIBOR did it successfully even with all the controls you claim the banks put in place.
> You may think this, but traders at banks are subject to tons of surveillance.
Yes, there is tons of surveillance. There is (in my experience) fairly little actually effective surveillance. For once, surveillance is never an interesting task. I consider it the same as guard duty. 99% of the time, nothing happens. Humans are not good at catching unexpected outliers. So you automate a lot of the checks, but these either produce too many false positives and thus bury the true problems in the noise, or they can be circumvented.
As I wrote, I consider the root cause to be a problem of incentives and conflicts of interest. No amount of patching with egregious audit and or lawyering will fix this. I consider statements like "but look at all the checks we already do" theatrics.
Look I'm in the industry. I have to complete 5 different training and educational courses every month, spanning from market abuse, to insider trading to fraud. Nobody takes this crap seriously and it is broadly considered a complete and utter waste of time. We have to fulfill a bazillion reporting obligations, but all of it is just a thin veneer of compliance to tick checkboxes. Every year, some chums from KPMG/PwC/<insert alphabet soup> come around, check that there are no obvious problems and rubberstamp everything. They find some token things which get reported and rectified so it looks like they actually do something.
I have friends who work in compliance/audit departments, and even those who want to do their work properly, run into problems because it's tricky to put heat on any group that is making money.
Most people I encounter in the industry are actually honest and hard working. Even though the checks are more or less easily circumvented, the majority of people choose not to do obviously illegal things. But to claim that the current setup is somehow successful at preventing shenanigans is dishonest.