In the first article, we saw how markets work thanks to market makers. In the second, how bots exploit price oscillations via grids.
At this point, an impression may emerge: if the market swings enough, then the strategy seems almost “naturally” profitable.
This is precisely where the trap lies.
Because behind this mechanism lies a central risk, often underestimated: inventory.
When the back and forth becomes rarer, the grid stops being a loop of small wins and becomes a matter of position size on a single foot.
To see how the exhibition can be framed while keeping this logic, the presentation of the Neutralised strategy links the harvest of oscillations and safeguards.
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A simple but decisive notion
L’iinventory corresponds to the composition of the portfolio.
In other words, the distribution between assets and non-exposed capital.
In a stratégie de type gridthe inventory is constantly evolving.
When the market falls, the strategy buys gradually.
When the market rises, she sells gradually.
So far, everything seems logical.
But this dynamic has a direct consequence: the portfolio never stays balanced.
What happens in a trend
It is in the directional phases that the problem appears.
Let’s imagine a market that is falling continuously.
At each level, strategy buys. It is accumulating more and more assets, hoping to capture a future rebound.
But if the decline continues, this accumulation becomes a growing exposure to a losing asset.
Conversely, in a strong rise, the strategy sells gradually. She is reducing her exposure, even as the market continues to rise.
In both cases, the strategies move away from a balanced position.
She becomes dependent on a return from the market… which may not arrive immediately.
Why this risk is often misunderstood
Lots ofinvestors only look at winning cycles.
They observe that each purchase is followed by a sale, and deduce that the strategy mechanically captures a return.
But this vision assumes an implicit condition: that the market oscillates sufficiently around an equilibrium point.
When this condition disappears, the mechanics change.
Cycles no longer close properly, and inventory begins to drift.
It is this drift which gradually transforms a profitable strategy into a fragile strategy.
A structural problem, not a bug
This point is important.
The inventory is not an anomaly. It is at the very heart of how market making works.
Providing liquidity involves agreeing to temporarily take a position.
The role of the market maker is not to avoid exposure, but to manage it.
It is precisely this management that makes the difference between a naive strategy and a more robust approach.
Understanding these dynamics in detail
A Neutralis conference showcases quantitative strategies that exploit crypto volatility while limiting dependence on a single direction.
The first answers to this problem
Faced with this risk, several adjustments exist.
Some systems will change their behavior depending on exposure. Others will reduce their activity in certain market conditions.
But these adjustments often remain partial.
They alleviate the problem without completely solving it.
Because as long as the strategy is based solely on the grid, it remains dependent on the structure of the market.
Towards more structured risk management
This is where more advanced approaches come in.
Rather than suffering from inventory imbalances, certain strategies seek to regulate them.
The idea is no longer just to capture volatility, but to control the overall exposure of the portfolio.
This may involve hedging mechanisms, or more dynamic management of the position.
The objective is simple: to prevent a progressive drift from becoming a major risk.
It is in particular this type of problem that the Neutralis strategy seeks to address, by combining the exploitation of oscillations and the supervision of the exhibition.
Understanding inventory profoundly changes the way we read market making.
We are moving from a “mechanical” vision to a much more dynamic vision, where each decision impacts the balance of the portfolio.
In the following article, we will see how market makers actually adjust their orders according to the market, and why an effective strategy cannot remain static.
