Life in the pits: Competitive market making and inventory control-further Australian evidence

Manaster and Mann (1996) (herein M&M96) analyse local trading activity on the Chicago Mercantile Exchange and demonstrate, in direct contradiction to inventory control models, that locals with longer (shorter) inventory positions typically trade at higher (lower) bid and ask prices than other locals. M&M96 had a weakness in their data-set that compromised their ability to accurately track locals inventory positions. The tests developed by M&M96 are replicated using a data-set for Share Price Index (SPI) futures contract traded on Sydney Futures Exchange (SFE) which overcomes the weaknesses in M&M96. Consistent with M&M96, the evidence provided in this study challenges received inventory control models.