Intraday Market Making with Overnight Inventory Costs

56 Pages Posted: 29 Aug 2017

See all articles by Tobias Adrian

Tobias Adrian

International Monetary Fund

Agostino Capponi

Columbia University

Erik Vogt

Citadel LLC

Hongzhong Zhang

Columbia University

Multiple version iconThere are 3 versions of this paper

Date Written: August 2017

Abstract

The Treasury market is increasingly intermediated by non-bank proprietary trading firms. These firms differ notably from incumbent dealers in that they tend to unwind inventories at the end of the day. To shed light on the impact these new intermediaries have on market quality, we model a market making proprietary trading firm that faces overnight inventory costs. The resulting inventory hedging demand generates rising price impact and widening bid-ask spreads as the end of the trading day approaches. These predictions are borne out in the U.S. Treasury data.

Keywords: Financial Intermediation, market liquidity, market making, Market microstructure theory

JEL Classification: G01, G12, G17

Suggested Citation

Adrian, Tobias and Capponi, Agostino and Vogt, Erik and Zhang, Hongzhong, Intraday Market Making with Overnight Inventory Costs (August 2017). CEPR Discussion Paper No. DP12245, Available at SSRN: https://ssrn.com/abstract=3028611

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.tobiasadrian.com

Agostino Capponi

Columbia University ( email )

S. W. Mudd Building
New York, NY 10027
United States

Erik Vogt

Citadel LLC ( email )

131 S Dearborn Street
Chicago, IL 60603
United States

Hongzhong Zhang

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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