Quick definition Dealer inventory is the securities a dealer holds. When inventory is high, the dealer lowers prices (tries to sell). When inventory is low, the dealer raises prices (tries to buy). What it is Every market maker accumulates and sheds inventory. From buying, they become long. From selling, they become short. Large inventory creates risk (prices might move against them). Dealers manage inventory by adjusting quotes. If you've bought 100,000 shares, you want to sell them (even at slightly lower prices), so you lower your ask. Why it matters Dealer inventory determines liquidity and pricing. When dealers are long heavy inventory, spreads widen and bid prices are soft. When dealers are short, ask prices are soft. Inventory dynamics create predictable patterns: overnight inventory must be worked down, causing prices to move in a particular direction the next morning. Practical example A dealer has bought a lot of stock. They're now long 100,000 shares, facing inventory risk. They lower their ask from 100.31 to 100.27 to encourage selling and reduce inventory. A buyer fills the ask at 100.27. The dealer is now short 50,000 shares from their original 100,000. Inventory and profitability Market maker profits depend on managing inventory efficiently. Buying low and selling high is the ideal, but inventory creates timing pressure. See also - Inventory Risk - Market Maker - Quote Adjustment - Position Management
