Inventory risk
Definition · Level 6 · Desk language
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The risk of holding a position, bought from a client or sold short to one, while the price moves against you: a reason market makers widen spreads.
Example
Bought 50,000 from a seller; the stock drops 20 cents before she can sell: she loses $10,000.
Where Tradecraft teaches it
Level 6 · Desk language, in the lesson “Market makers, fees and price improvement”: Why spreads widen, who is paid to add liquidity and how a retail order can fill inside the spread.
Related terms
- Adverse selectionThe risk that whoever trades with you knows more than you do, so the trades you get are the ones that hurt; repeated one-way flow is a warning sign.
- Maker-takerExchange pricing that pays a rebate to orders adding resting liquidity and charges a fee to orders removing it.
- PFOFPayment for order flow: a wholesaler pays a retail broker to route it customer orders, which it fills itself, often with slight price improvement.
- Price improvementA fill at a better price than the best displayed quote (the NBBO): lower for a buyer, higher for a seller.
- Trade-throughFilling an order at a worse price than a better protected quote displayed on another venue.
- “20 by 50”Size quote: the first number is the quantity on the bid, the second the quantity on the offer (round lots, contracts or millions, depending on the…