Journal of Multinational Financial Management 9 (1999) 373–385 Life in the pits: competitive market making and inventory control — further Australian evidence Alex Frino a,1 , Peter Forrest b, *, Matthew Duffy a a Department of Finance, Uniersity of Sydney, Sydney NSW 2006, Australia b Sydney Futures Exchange, 30 – 32 Grosenor St., Sydney NSW 2000, Australia Abstract 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. © 1999 Elsevier Science B.V. All rights reserved. Keywords: Microstructure; Inventory management; Execution skill; Sydney futures exchange JEL classification: G10; G13 www.elsevier.com/locate/econbase 1. Introduction A number of papers have developed inventory control models of market maker quote and inventory behaviour (e.g. Stoll, 1976; Ho and Stoll, 1983; Biais, 1993). Inventory control models imply that market makers set bid and ask quotes in * Corresponding author. Tel.: +61-2-92560535; fax: +61-2-92560144. E-mail addresses: alex@frc.usyd.edu.au (A. Frino), pforrest@sfe.com.au (P. Forrest) 1 Tel.: +61-2-99291809; fax: +61-2-99291830. 1042-444X/99/$ - see front matter © 1999 Elsevier Science B.V. All rights reserved. PII:S1042-444X(99)00013-4