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Intraday Market Making with Overnight Inventory Costs

Listed author(s):
  • Adrian, Tobias
  • Capponi, Agostino
  • Vogt, Erik
  • Zhang, Hongzhong

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 12245.

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Date of creation: Aug 2017
Handle: RePEc:cpr:ceprdp:12245
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  1. Biais, Bruno & Foucault, Thierry & Moinas, Sophie, 2015. "Equilibrium fast trading," Journal of Financial Economics, Elsevier, vol. 116(2), pages 292-313.
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