What Is "Inventory Risk" and How Does It Affect RFQ Quoting? ⎊ Path

What Is “Inventory Risk” and How Does It Affect RFQ Quoting?

Inventory risk is the risk that the assets a market maker holds (their inventory) will decrease in value before they can be sold or hedged. In RFQ quoting, if a market maker is already long a particular option, they face negative inventory risk if they continue to buy more of that option.

To manage this, they will quote less aggressively (wider spread) on the side that adds to their current inventory and more aggressively on the side that reduces it, effectively using their quotes to rebalance their book.

How Does the Capital Efficiency of an LP Influence Their Quoting Aggressiveness?

Can a Market Maker Use a TWAP Strategy to Execute Their Own Large Inventory Rebalancing?

How Does a Market maker’S’inventory Skew’ Affect Their Willingness to Quote a Tighter Bid or a Tighter Offer?

How Does a Request for Quote (RFQ) System Differ from an Order Book Exchange in Derivatives?

How Do Market Makers Adjust Their Quote Size Based on Observed Fill Rates?

How Does a “Last Look” Mechanism Relate to the Concept of Quote Firmness?

What Specific Algorithms Are Used to Dynamically Adjust Quotes Based on Inventory Delta?

What Are the Key Differences between an RFQ Platform and a Central Limit Order Book (CLOB)?

Glossar

Inventory Risk

Exposure ⎊ The core of inventory risk within cryptocurrency derivatives, options trading, and financial derivatives stems from the potential for losses arising from unhedged positions or imbalances between assets and liabilities.

Market Maker

Agency ⎊ A market maker in cryptocurrency derivatives functions as a principal, providing liquidity by simultaneously posting bid and ask prices for contracts, notably perpetual swaps and options.