Inventory based execution is a trading strategy where a market maker or liquidity provider uses their existing holdings of an asset to fulfill incoming buy or sell orders. Rather than matching buyers and sellers directly, they absorb the order into their own inventory, then later seek to rebalance their position. This method allows for immediate trade execution and contributes to market liquidity. It carries the risk of inventory price fluctuations before rebalancing occurs.
Context
Inventory based execution is relevant in crypto market making and decentralized exchanges, often appearing in news about trading algorithms and liquidity provision. Reports analyze how this strategy impacts bid-ask spreads, market depth, and overall trading efficiency. The discussion frequently addresses the risks faced by market makers, such as impermanent loss in automated market maker pools, and the capital requirements for maintaining sufficient inventory. Understanding this approach helps explain aspects of market structure.
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