Skewing Quotes to Manage Risk

Skewing means moving both quotes in the same direction, keeping the spread width unchanged. It is the primary tool for steering inventory back toward flat.

The mechanism

You are long and want to sell. Move both quotes down:

Two effects at once. Your offer is now cheaper, so buyers are more likely to lift it, and you sell. Your bid is now lower, so sellers are less likely to hit it, and you stop accumulating.

Worked through: fair value 100.00, spread four cents, so the neutral quote is 99.98 at 100.02. Long 2,000 and skewing down two cents gives 99.96 at 100.00. Your offer now sits at fair value, which is aggressive: you are willing to sell at no margin because reducing the position is worth more than the spread on this trade.

The two controls are worth separating deliberately. Move the inventory and the width readout does not change; move the width and the quote stays centred where it was. Push the skew far enough and the offer crosses below fair value, at which point you are paying to reduce rather than merely giving up margin.

Why it is the cheapest tool

Compare the three ways to reduce a position:

Skew: costs nothing directly. You give up a little expected margin on the side you want to trade, and you only pay when someone actually trades with you.

Cross the spread: immediate and certain, but you pay the full spread plus fees right now.

Hedge: neutralises price risk without needing an offsetting trade in the same instrument, but pays the hedge's spread and introduces basis risk.

Skew is the default because it works with the flow rather than against it. You are not demanding liquidity, you are making yourself the most attractive counterparty for the trade you want.

How much to skew

The right amount scales with how badly you need to reduce the position:

• Small inventory: a light skew, perhaps a fraction of a tick in effect, letting normal flow rebalance you over time.
• Moderate inventory: a full tick or more, actively encouraging one side.
• Near limits: skew hard enough that your quote is unattractive on the accumulating side and aggressive on the reducing side, potentially quoting at or through fair value.
• At the limit: stop skewing and cross the spread. Skew is a probabilistic tool and cannot guarantee a fill; at a hard limit you need certainty.

A common formulation makes skew proportional to inventory:

with $\gamma$ tuned to how aggressively the desk wants to mean-revert its position. This is essentially what automated market making systems do.

The information you are giving away

Skew is visible. A market maker quoting persistently below the consensus mid is signalling that they are long and want out, and sophisticated counterparties can use that: they know you are a motivated seller and may wait, or trade against you elsewhere first.

This is a real cost of skewing hard, and it is why very large positions are often reduced through hedging or by working the order across venues rather than by advertising the intent in a public quote.

Skewing for inventory is a separate decision from moving fair value because a fill told you something, and the two are easy to blur together. Reading your counterparty separates them.