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Managing Market-Maker Inventory Across Related Assets

Article Quant Q&A · Author: ltrd
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Summary

The document offers a basic principle for market makers managing quotes across multiple securities: adjust prices in response to inventory in the quoted asset, and also account for inventory in assets considered similar. This extends single-instrument inventory management to a portfolio of related lines, where exposures can interact.

It identifies quote adjustments as a competitive design choice, including how much to move prices and whether to adjust the midpoint, bid, or ask. It also leaves open how firms define similarity between assets. The response provides no formal model, quantitative rule, evidence, or guidance on order cancellation and updates, so it serves as a high-level framing rather than an implementable strategy.

Key ideas

  • A market maker can adjust quotes to reflect inventory in the instrument being quoted.
  • Inventory in related instruments can also influence the quote for a given asset.
  • The size and location of quote adjustments, and the definition of related assets, are strategic choices.
  • The discussion does not specify a quantitative inventory-control model or order-update procedure.

Tags

Market makingPortfolio constructionExecutionMarket microstructure
Full text
# Market Maker portfolio management


# Market Maker portfolio management












I am interested in articles/strategies related to portfolio and inventory management for market makers and to management of order cancellation, updates of order, etc.

Most of the strategies from articles are related to a market maker who quotes only one line (one security). What about those who quotes several lines?

## Answer by mr_mm (score 1)

https://quant.stackexchange.com/a/74230

I can't provide any papers, but market makers tend to shift pricing by the current inventory they have in that asset. Furthermore they will shift pricing of asset A by the inventory they have in all assets similar to asset A.

The methodology for how much to shift by, whether to shift mid/bid/ask and what constitutes as 'similar' is what the market making firms compete on.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.