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Rev Fin 1996; 9:953-975
© 1996 the Society for Financial Studies

Article

Life in the pits: competitive market making and inventory control

S Manaster1 and SC Mann2
1 University of Utah, USA
2 Texas Christian University, USA

Abstract

We use futures transaction data to investigate cross-sectional relationships between market-maker inventory positions and trade activity. The investigating documents strongly that traders control inventory throughout the trading day. Despite this evidence of inventory management, typical inventory control 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 takeing by futures market floor traders.


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