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Intraday Market Making with Overnight Inventory Costs

Tobias Adrian (), Agostino Capponi, Erik Vogt and Hongzhong Zhang

No 12245, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: G01 G12 G17 (search for similar items in EconPapers)
Date: 2017-08
New Economics Papers: this item is included in nep-mst
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