Interview Question: Make A Market on Anything
I don't understand interview questions about "making a market" when it isn't applied to financial assets. What does it mean if an interviewer asks you to make a market on the number of windows in this building?
I just had an interview and my resume mentioned I was a runner, so the interviewer asked me to make a market for the time it takes me to run 5k. All I knew was that my expected time was 16m30s, and that i had to make a spread on this time so I said 16m20s and 16m40s. But what does this mean? Who's buying? What does it mean bid at 16m20s and sell at 16m40s?
Furthermore, how are you supposed to answer these types of questions? How do I set the spread size? Should it always be symmetrical? Is the interviewer hitting my bids/asks?
How to Make a Market on an Item in an Interview
This response was originally posted by user @oneshine", a sales and trading analyst.
In practice, there are three main determinants of your market (bid-ask):
This is what you think it's worth. If it's a market on the outcome of a die roll then you can make a tighter market since it is a known quantity (3.5). If it is something obscure, like the number of ping pong balls that can fit in the Empire State Building you will need to make your market wider. The interviewer wants to see that you are adjusting your market for risk due to uncertainty.
Last Price Traded
This is the going market price. Sometimes the trading price deviates from your theoretical value. In this case the trader needs to balance his faith in the market with his faith in his models. Interviewers don't usually give you the last traded price so this will probably be irrelevant.
This is your net long/short exposure. Ideally, market-makers like to be flat, meaning they have no exposure to movements in the asset price. If you have accumulated a serious position you would want to make your markets asymmetric to make either buying or selling more desirable. For example, say you are extremely long an asset that is worth $.50. A reasonable market may then be $.40 -- $.55. This means you are willing to sell for less theoretical profit than you are willing to buy. You are giving up some "edge" to reduce your exposure. Generally, if you are flat your market should be symmetric (i.e. bid/ask are equidistant from theoretical value).
A trader's market is a balance of these three things. It is not uncommon for interviewers to ask for your confidence interval. In this case just remember that a higher confidence interval translates to a wider market. Also, don't give answers like 0-$1billion. In the real world the highest bid and the lowest ask determine the market. The tightest and fastest markets get the trade and no one will deal with absurdly wide traders.
Market Making Interview Question Example
User @marcellus_wallace", a sales and trading analyst, shared an example of making a market:
Taking your example of 400 windows in the building.
339.95-400.05. If you make a super tight market, your margins are garbage and your basically telling your interviewer how many windows you think there is. A market maker has little value in such a situation, your basically doing what HFT firm does. If you do know the exact value in this case 400, as mentioned your best bet would be skew the market one way or another, to get parties to transact. I will wait you out in this case till you sell to me at 400, which you make 0 then.
320-420. Ok if you think there is 400 windows, and I come in and bid 370. What do you do in that situation then hold firm at 420? Come down to 410? etc...
Again it's more of an art than science but the question gets you thinking.
Check out a video about how to answer this kind of question below:
Read More About Market Making Strategies on WSO
- Make A Market Questions With A Twist
- Can You Explain Me Market Making Strategies?
- Market Making Group Exercise
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