Market maker inventory is the net long or short position in a security that a market maker holds as a by-product of quoting prices to buy and sell. Because buyers and sellers do not arrive at the same moment, the market maker absorbs the imbalance onto its own book and aims to trade out of it later. Holding the position exposes the firm to price moves, so part of the bid-ask spread is compensation for this inventory risk.
Market makers manage inventory by adjusting their quotes: a firm that is long lowers both its bid and its offer to attract buyers and deter sellers, and does the reverse when short. They also hedge with related instruments and set position limits. Inventory effects are a central topic in market microstructure, and bank capital rules for market risk affect how much inventory dealers are willing to carry, which in turn influences market liquidity.