Due to the importance of inventories and the fact that asymmetric information models are extensively discussed in literature, this thesis exclusively focuses on inventory control models and provides a survey of theory and empirical results on the role of inventory in the price formation process. Because most of the relevant literature is based on the U.S. exchange market, this thesis is mainly confined on inventory control of specialists on the New York Stock Exchange (NYSE) and of dealers on the National Association of Securities Dealers (NASDAQ).
To understand the costs of holding inventory, Section 2 introduced three important drivers of inventory: capital constraints, liquidity and volatility. Section 3 summarises the effect of market maker inventory and its costs on liquidity and how this affects the bid-ask spread. In Section 4, the impact of inventory on asset prices, especially of inventory levels, is discussed in more detail. Section 5 briefly turns to changes in market structure and how they affect the role of traditional market makers and their inventories. Section 6 finally concludes.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- What drives Inventory?
- Capital Constraints
- Liquidity
- Volatility
- How does Inventory drive Liquidity?
- Inventory and Liquidity
- Impact on the Bid-Ask Spread
- Summary
- How does Inventory affect Asset Prices?
- Theory
- Empirical Results
- Summary
- Changes in Market Structure
- Dilution in the Role of Market Makers/Dealers
- Technological Advances and High Frequency Traders
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This thesis aims to investigate the role of inventory in the price formation process, particularly focusing on inventory control models. It analyzes how market maker inventory impacts liquidity, bid-ask spreads, and asset prices. The thesis mainly examines the U.S. exchange market, specifically the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASDAQ).
- Inventory control models and their application to market making
- The impact of market maker inventory on liquidity and price formation
- The role of capital constraints, liquidity, and volatility in driving inventory levels
- The relationship between market maker inventory and the bid-ask spread
- Changes in market structure and their impact on the role of traditional market makers
Zusammenfassung der Kapitel (Chapter Summaries)
- Introduction: This chapter introduces the concept of market microstructure and the role of market makers in providing liquidity. It explores the two main types of models used to explain market maker behavior: inventory control models and asymmetric information models. The chapter focuses on inventory control models and explains why they are crucial for understanding the price formation process.
- What drives Inventory?: This chapter examines three key factors that influence market maker inventory levels: capital constraints, liquidity, and volatility. It discusses how these factors affect a market maker's ability and willingness to hold inventory, highlighting the costs associated with high inventory levels.
- How does Inventory drive Liquidity?: This chapter explores the relationship between market maker inventory and liquidity. It examines how inventory levels affect the bid-ask spread and discusses the implications for market efficiency. The chapter also provides a summary of the key findings.
- How does Inventory affect Asset Prices?: This chapter delves into the impact of inventory on asset prices. It explores the theoretical framework and presents empirical results that demonstrate the relationship between inventory levels and price movements. The chapter concludes with a summary of the key insights.
- Changes in Market Structure: This chapter briefly examines the evolving market structure and its impact on the role of traditional market makers and their inventories. It discusses the increasing importance of high-frequency traders and the role of dark pools in the market.
Schlüsselwörter (Keywords)
This thesis focuses on market microstructure, inventory control models, market maker behavior, liquidity, bid-ask spreads, asset prices, capital constraints, volatility, high-frequency traders, dark pools, New York Stock Exchange (NYSE), and National Association of Securities Dealers (NASDAQ).
- Quote paper
- Evelyn Rill (Author), 2015, The Role of Market-Maker/Dealer Inventories in the Price Formation Process, Munich, GRIN Verlag, https://www.grin.com/document/309403
