But this maintenance of liquidity and the smooth functioning of markets has become central to financial stability because even as regulated institutions have become more sound, they and other participants have come to rely more on markets for their own risk management. Hence dislocation can have serious consequences.
I am sceptical, incidentally, of the argument that hedge funds and the like necessarily add to liquidity. Liquidity means being able to change a position without affecting the price, and depends on someone being prepared to make a price. Hedge fund activity adds turnover, which probably means that in good times there is more incentive for price makers.