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Intraday Market Making with Overnight Inventory Costs

Author

Listed:
  • Adrian, Tobias
  • Capponi, Agostino
  • Vogt, Erik
  • Zhang, Hongzhong

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.

Suggested Citation

  • Adrian, Tobias & Capponi, Agostino & Vogt, Erik & Zhang, Hongzhong, 2017. "Intraday Market Making with Overnight Inventory Costs," CEPR Discussion Papers 12245, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12245
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    2. Bastien Baldacci & Philippe Bergault & Joffrey Derchu & Mathieu Rosenbaum, 2020. "On bid and ask side-specific tick sizes," Papers 2005.14126, arXiv.org, revised May 2020.
    3. Matthew Lorig & Zhou Zhou & Bin Zou, 2019. "Optimal Bookmaking," Papers 1907.01056, arXiv.org, revised Mar 2021.
    4. Min Dai & Steven Kou & H. Mete Soner & Chen Yang, 2023. "Leveraged Exchange-Traded Funds with Market Closure and Frictions," Management Science, INFORMS, vol. 69(4), pages 2517-2535, April.
    5. Yu An & Zeyu Zheng, 2023. "Immediacy Provision and Matchmaking," Management Science, INFORMS, vol. 69(2), pages 1245-1263, February.
    6. Agostino Capponi & Jos'e E. Figueroa-L'opez & Chuyi Yu, 2021. "Market Making with Stochastic Liquidity Demand: Simultaneous Order Arrival and Price Change Forecasts," Papers 2101.03086, arXiv.org.
    7. Ivan Guo & Shijia Jin & Kihun Nam, 2023. "Macroscopic Market Making," Papers 2307.14129, arXiv.org, revised Jun 2024.
    8. Jonathan Ch'avez-Casillas & Jos'e E. Figueroa-L'opez & Chuyi Yu & Yi Zhang, 2024. "Adaptive Optimal Market Making Strategies with Inventory Liquidation Cos," Papers 2405.11444, arXiv.org.
    9. Farshid Abdi & Botao Wu, 2018. "Informed Corporate Credit Market Before Monetary Policy Surprises: Explaining Pre-FOMC Stock Market Movements," Working Papers on Finance 1828, University of St. Gallen, School of Finance.
    10. Lorig, Matthew & Zhou, Zhou & Zou, Bin, 2021. "Optimal bookmaking," European Journal of Operational Research, Elsevier, vol. 295(2), pages 560-574.

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    More about this item

    Keywords

    Market microstructure theory; Market liquidity; Market making; Financial intermediation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G01 - Financial Economics - - General - - - Financial Crises

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