Market making interview question HFT firm: correct approach?
I am interviewing for the position of trader at a HFT firm (Optiver/Flowtraders/IMC). Part of the interview process is a market making game.
I have been looking online for tips for this type of question but I was not really able to find anything substantial. My approach (for now) is very basic and I don't think it's correct:
Estimate quantity (e.g: amount of windows in the building).
Based on how confident I am, make a market on the quantity. If I'm not too sure about the number of windows, and I think it's around 400, I might start with 350-450 spread. If the quantity I'm estimating is more known (like the expected value of a dice roll (3.5)) I could make my market very tight (3.4-3.6).
If the interviewer buys from me, I might want to move up a bit. Now, the question becomes how I want to do it. I could in principle move to 450-550 spread. If they sell to me I am neutral and haven't made money but gained some information on the spread (likely 400-500 could be good). If they buy again, I know the answer must be higher and I can move to say 550-650 and repeat the process. Danger of this method is if the value is much higher (say 1000) I would spend like 5 trades selling for a substantially lower price and lose a decent amount until I get to the point where they start selling to me and I know I'm good.
Now, all of this is very arbitrary and I am not sure if my approach makes sense. Do you have any advice?
I'm trading at the moment but it's a little slow but I can't read the whole thing so bear with me. What if he doesn't hit you and you're stuck with it? But if it's just you and him, I doubt he's gonna sell it back to get flat. So what you do, try to do a price discovery... Keep it super wide and if he doesn't lift you, tighten it up SLOWLY, don't bid it up though, unless you have to and take a loss. Skew your market. If you have to take a loss, on your first trade to create volume, fine but at the end of the day, you make market, you have the upper advantage to fuck with him.
On top of price discovery, don't just make a market, really analyze what the value should be, either using other traders to see what they're valuing it or if they can tighten up the market or create some analysis on how to price it.
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