Market Maker Inventories and Liquidity

Discussion in 'Trading' started by ASusilovic, Oct 18, 2009.

  1. Market Maker Inventories and Liquidity
    Terrence Hendershott
    Pamela C. Moulton
    Mark S. Seasholes*
    May 9, 2007

    Traditional microstructure models predict that market makers’ inventory positions do not
    impact liquidity (the effective cost of trading). Models with limited market maker riskbearing
    capacity predict that larger inventories negatively impact overall liquidity and the
    effect is greater for more volatile stocks. Using 11 years of NYSE specialists' inventory
    data, this paper tests these theoretical predictions. We find that larger inventory positions
    lead to lower liquidity both at the market level and at the market maker’s firm level. We
    also find that the impact of inventories is larger for the liquidity of high-volatility stocks
    and for smaller market making firms. Finally, we confirm a prediction of models both
    with and without limited risk-bearing capacity: Inventory positions affect the relative
    liquidity for stock buyers versus sellers.
  2. 1) 1994 to 2004. That's ancient history.
    2) Do the authors take derivative and hedge-related trading into account?
    3) The chart on page-37 could be more "relevant" if it were overlayed against the S&P-500.
    4) 38 pages! Thanks for almost curing me of my insomnia. :cool:
  3. Good morning ! :D
  4. I like this paper... Somewhat counterintuitive conclusion, so will need to read a bit more carefully. Thx!