We show that market-maker balance sheet and income statement variables explain time variation in liquidity, suggesting liquidity-supplier financing constraints matter. Using 11 years of NYSE specialist inventory positions and trading revenues, we find that aggregate market level and...

Traditional microstructure models predict that market makers' inventory positions do not impact liquidity (the effective cost of trading). Models with limited market maker riskbearing capacity predict that larger inventories negatively impact overall liquidity and the effect is greater for more...

We show that market-maker balance sheet and income statement variables explain time variation in liquidity, suggesting liquidity-supplier financing constraints matter. Using 11 years of NYSE specialist inventory positions and trading revenues, we find that aggregate market-level and specialist...