Using Multiple Exchanges:
One strategy to manage inventory is to use multiple exchanges, most OTC desks have access to all the different exchanges and use ‘smart order routing’ on their systems, so anytime they need to hedge off some risk they may pro-rata distribute the order out across multiple exchanges. They may also use some sort of schedule so that they don’t get rid of it all at once. Instead, they slowly release it into the markets, doing it in this way minimizes market impact and can improve slippage.
Sharing risk/exposure with other OTC desks:
Another strategy is sharing flow with other OTC desks. For example, Let’s say counterparty 1 buys 1000 bitcoin from the OTC desk, we may then decide to buy 500 bitcoin from another desk. So the counterparty pays us and we then pay’s another OTC desk. Doing this will lower exposure and means there is less risk on the books. With the remaining 500 bitcoin we could either buy them from another OTC desk or work the other 500 bitcoin on the markets.
‘Warehousing’ the risk and waiting for matching counterflow:
Counterflow is very valuable to OTC desks, to explain counterflow let’s say that Alice comes in and buys 100 bitcoin from the desk, and then Bob comes in half an hour later and sells 100 bitcoin. The desk has now naturally balanced itself out, they carried some inventory risk for half an hour but in doing so they avoided the need to have any hedging cost whatsoever. So instead of making a profit on the spread with Alice and then losing it, or at least part of it in the hedging process. They can make a profit on the spread with both Alice and Bob without any hedging risk