Inventory Skewing

Inventory skewing is a strategy used by market makers to manage their risk by intentionally adjusting their quotes to attract trades that balance their current position. If a market maker is net long, they will skew their quotes to make selling more attractive and buying less attractive.

This helps them return to a neutral inventory position without having to aggressively trade on the open market, which would cause slippage. In the cryptocurrency market, where inventory management is challenging due to volatility, skewing is a common technique used to maintain balance.

Traders can sometimes detect this skewing by observing an imbalance in the order book. Understanding inventory skewing helps in identifying where the market maker's bias lies and how it might influence short-term price movements.

It is a subtle but important aspect of market microstructure that reflects the ongoing battle for equilibrium. By observing these skews, one can better understand the forces shaping the order book.