I understand that most market makers maintain non directionality i.e. they always aim to be perfectly hedged. So if they take a long position in X, they will take an offsetting short position in a hedge Y. My question is however, say that a market maker has inventory of 100 google stocks and he sells 50 google stocks from his own inventory, does this action require hedging? I am a bit confused because I understand that if he were to SHORT the 50 google stocks (i.e. those stocks that he sold were not from his inventory), then there would be a reason for him to hedge this position since he would have to return those stocks. But does a sell position coming from your own inventory require a hedge since after all you're just getting rid of it from your books? Thanks.

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    $\begingroup$ As you point out, if the sell order is filled from your own inventory, you don't necessarily need to hedge. Btw, market-making is not just about keeping your books flat all the time and trying to capture the bid-ask spread. Most of the time, a market-maker would have some view: If they think the demand will go up, they would want to build up some inventory in advance. If they feel there will be demand to sell, they might want to go short, so when the sell orders come in, these will "naturally" close their shorts. $\endgroup$ Jan 29, 2021 at 10:19


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