Discussion paper

DP12245 Intraday Market Making with Overnight Inventory Costs

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.


Adrian, T, A Capponi and E Vogt (2017), ‘DP12245 Intraday Market Making with Overnight Inventory Costs‘, CEPR Discussion Paper No. 12245. CEPR Press, Paris & London. https://cepr.org/publications/dp12245