Life in the Pits: Competitive Market Making and Inventory Control

REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 3

Posted: 5 May 1998

See all articles by Steven Manaster

Steven Manaster

University of Utah - Department of Finance

Steven C. Mann

Texas Christian University - M.J. Neeley School of Business

Abstract

We use futures transaction data to investigate cross- sectional relationships between market maker inventory positions and trade activity. The investigation documents strongly that traders control inventory throughout the trading day. Despite this evidence of inventory management, typical inventory control models are contradicted by our data. These inventory models predict that market maker reservation prices are negatively influenced by inventory. Surprisingly our evidence shows, as a strong and consistent empirical regularity, that correlations between inventory and reservation prices are positive. We interpret the evidence as consistent with active position taking by futures market floor traders

JEL Classification: G13, G12, D84

Suggested Citation

Manaster, Steven and Mann, Steven Carl, Life in the Pits: Competitive Market Making and Inventory Control. REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 3, Available at SSRN: https://ssrn.com/abstract=7464

Steven Manaster

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-3171 (Phone)

Steven Carl Mann (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

Campus Box 298530
Fort Worth, TX 76129
United States
817-257-7569 (Phone)
817-257-7227 (Fax)

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