Inventory Risk
Market Microstructure glossary · Spread Economics & Liquidity Measurement
Definition
The risk that the price of a security will change adversely while a dealer holds it in inventory.
Inventory Risk in plain English
Inventory risk is the danger a dealer faces from simply HOLDING a security, waiting to resell it, while its price might drop in the meantime. Dealers make markets by buying from sellers and selling to buyers, so they're constantly stuck holding stuff for a while — and if bad news hits before they can pass it on, they eat the loss. It's like a fruit stand owner who buys a crate of bananas hoping to sell them by afternoon; if nobody comes and the bananas brown, that's their problem, not the supplier's. Because of this risk, dealers charge a slightly wider gap between their buy and sell prices to protect themselves.
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Practice Inventory Risk
What risk arises because the value of that position can move before it is sold?
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