What's my Axe?

Understanding market maker inventory management and quote adjustment

This is an easy option-theory question that tests whether you understand how market makers use their quoted spreads to manage inventory imbalance. It's the kind of question trading desks ask to confirm a candidate grasps the link between inventory position, risk, and pricing.

When a market maker accumulates an undesired inventory position—in this case, becoming short—they face directional risk. The core insight is that quote adjustment is a tool to rebalance: by moving prices in the right direction, a market maker can make one side of the market more attractive to customers, encouraging flow that corrects the imbalance. This concept applies across equities, options, and other venues where dealers manage two-sided risk.

• Bid-ask spread dynamics and inventory cost
• Adverse selection vs. inventory-driven pricing
• How quote levels signal hedging pressure to the market