What Is Inventory Risk?

Inventory risk is an important concept in market making.

A market maker may accumulate a net position while facilitating transactions.

If the market moves against that position, the resulting loss can offset some or all of the spread earned from trading.

Market makers may respond by adjusting quotes, changing their willingness to trade, or managing exposure through other transactions.

Their behavior depends on the specific market, strategy, and risk limits.

For retail traders, this offers a useful reminder: the other side of your transaction may have a completely different objective from yours.

Not every seller expects the market to fall, and not every buyer expects it to rise.

Participants trade for different reasons, including hedging and inventory management.