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    If you are asked to make a market on something in a trading interview what is it that they are after?

    I gather that I quote a bid-ask, but what if I need to quote on something abstract that doesn't have a price? For example, I need to make a market on the number of houses in London or something like that - do I simply form a spread over the expected number, and have it wide to account for error?

    What about quoting volume/size on the spread? For an abstract number that isn't 'traded', is it of any meaning to quote a size for the bid/ask 'prices'?
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    (Original post by invisiblehand)

    I gather that I quote a bid-ask, but what if I need to quote on something abstract that doesn't have a price? For example, I need to make a market on the number of houses in London or something like that - do I simply form a spread over the expected number, and have it wide to account for error?
    Correct. You don't need to quote any size on the bid/offer. Just the prices themselves.
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    Normally when they do this, its not the initial market theyre interested in. They'll normally react to your initial market with a buy/sell, and then ask you to quote another market (just to see if you understand the principles of market-making/options)
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    Thanks for the responses. So lets say I quote 8-10 on whatever, and they buy at 10, how would you adjust your spread?

    Should the adjustment based on how your expectation changes based on their action?

    I guess I also consider my position within the market (i.e. short at 10) and adjust my spread based on how I want the position to change? So I might quote a better bid price in order to exit the position?

    Anything else that needs to be considered within this context (liquidity/volatility/volume factors are excluded?)
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    (Original post by invisiblehand)
    Thanks for the responses. So lets say I quote 8-10 on whatever, and they buy at 10, how would you adjust your spread?

    Should the adjustment based on how your expectation changes based on their action?

    I guess I also consider my position within the market (i.e. short at 10) and adjust my spread based on how I want the position to change? So I might quote a better bid price in order to exit the position?

    Anything else that needs to be considered within this context (liquidity/volatility/volume factors are excluded?)
    If you believe your market is correct, then do not change your market. They can lift you all day at 10 if they wish, but dont change your market just cos someone hit or lifted you. You must have a reason for changing it. example, you quote 16-17, they lift you at 17, you move and quote 17-18, they lift at 18, you quote again 18-19 still trying to get out of your position, theyll just hit you at 18, making a profit without moving the actual market at all, the market continues to trade at 16-17 and they just made you buy 2 lots at 18.

    Its a typical trick to avoid if youre new to trading. Stick to what you believe. If you believe the market is where you believe it to be, then quote it.
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    (Original post by JakeF)
    If you believe your market is correct, then do not change your market. They can lift you all day at 10 if they wish, but dont change your market just cos someone hit or lifted you. You must have a reason for changing it. example, you quote 16-17, they lift you at 17, you move and quote 17-18, they lift at 18, you quote again 18-19 still trying to get out of your position, theyll just hit you at 18, making a profit without moving the actual market at all, the market continues to trade at 16-17 and they just made you buy 2 lots at 18.

    Its a typical trick to avoid if youre new to trading. Stick to what you believe. If you believe the market is where you believe it to be, then quote it.
    are you a trader?
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    (Original post by i_hate_teeth)
    are you a trader?
    i Am.
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    (Original post by i_hate_teeth)
    are you a trader?
    No. Im in Sales. Its not necessary to be a trader to understand the simple tricks. Trading is fun, i just prefer the sales side, especially given my role.
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    (Original post by JakeF)
    If you believe your market is correct, then do not change your market. They can lift you all day at 10 if they wish, but dont change your market just cos someone hit or lifted you. You must have a reason for changing it. example, you quote 16-17, they lift you at 17, you move and quote 17-18, they lift at 18, you quote again 18-19 still trying to get out of your position, theyll just hit you at 18, making a profit without moving the actual market at all, the market continues to trade at 16-17 and they just made you buy 2 lots at 18.

    Its a typical trick to avoid if youre new to trading. Stick to what you believe. If you believe the market is where you believe it to be, then quote it.
    This is very wrong. Infact, I'm almost convinced if you made a market of 8-10 in an interview and the trader bought from your repeatedly and you stuck with 8-10, you'd get dinged. Your prices should not just reflect your market views, but should also reflect the views of other market participants. If you're constantly getting lifted and not increasing your offer, then you're selling too cheaply.

    In the above scenario, the client didn't make any realised profit and is just net long one asset at a price of 17. Also, in a one point wide market, after getting lifted at 18, I think a follow on price of 17.X/18.X is a lot more likely, and makes a lot more sense than increasing your price to 18/19.
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    (Original post by Prince of Zamunda)
    This is very wrong. Infact, I'm almost convinced if you made a market of 8-10 in an interview and the trader bought from your repeatedly and you stuck with 8-10, you'd get dinged. Your prices should not just reflect your market views, but should also reflect the views of other market participants. If you're constantly getting lifted and not increasing your offer, then you're selling too cheaply.

    In the above scenario, the client didn't make any realised profit and is just net long one asset at a price of 17. Also, in a one point wide market, after getting lifted at 18, I think a follow on price of 17.X/18.X is a lot more likely, and makes a lot more sense than increasing your price to 18/19.
    yes but not always, you have to look at the information assymetries. In an interview i was asked to make a market on the area in square km's of the United States. Now in that case you know that he probably knows since he is asking you and so you move your market in response a little (as you said if you keep getting lifted your price is too cheap). On the other hand if he asks to make a market on the expected value of a role of a dice (1 tick wide), you say 3 - 4, and he lifts (for wtv reason) then you can sell at 4 all day, cuz you are not gonna make a market of 3.5 - 4.5 (unless you are using his dice...)
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    (Original post by acies)
    yes but not always, you have to look at the information assymetries. In an interview i was asked to make a market on the area in square km's of the United States. Now in that case you know that he probably knows since he is asking you and so you move your market in response a little (as you said if you keep getting lifted your price is too cheap). On the other hand if he asks to make a market on the expected value of a role of a dice (1 tick wide), you say 3 - 4, and he lifts (for wtv reason) then you can sell at 4 all day, cuz you are not gonna make a market of 3.5 - 4.5 (unless you are using his dice...)
    If Crazy-Trader at Mad-Hatter-Bank was trading the roll of a die, and was short 10 billion at 4, I'm pretty sure it'd be wise for them to pay 3.5 and lower their exposure. Or even 3.75. Because being there being a 1/3 chance of going utterly insolvent is probably considered 'bad risk management'.
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    I think a few of you are missing the point of a market making interview. The point is to test whether or not you can maintain a relatively flat (i.e risk-free) position, and whether you follow one sound strategy. Its not about just quoting the same market every time, that just defeats the point.

    If you quote 8-10, and they buy, then by all means go to 9-11. What they're really testing is whether you can remember your overall p/l at the end, and your overall position.
    Also, I'm pretty sure on the dice example, what they are testing is that you understand that with options, as long as you keep flat, the theoretical doesn't matter. Obviously everyone knows the expected value of a dice roll, and everyone's gonna quote 3-4. But the trick is not to keep quoting 3-4 if they keep buying at 4. All that'll happen is after 4 or so trades, he'll be like "oh no, i rolled a 6, you're in the ****"

    i.e definitely don't do what JakeF said cos you'll just create a massive short/long position
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    You just have to justify (as Ben did) the fact you'll likely take a loss if you're repeatedly hit or lifted (without being able to hedge).

    In reality, you're going to try to cover your position, or if you can't then you might widen your bid/offer, or if you're trading a relatively illiquid market, jam it against them if they continually come back for more.
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    there is a rather nice thread on whirlpool with a discussion about half way down where someone asks for a market in some cricket scores - a good opportunity to see some of the mistakes you are likely to make in this situation, and a neat solution.

    http://forums.whirlpool.net.au/archive/762684

    check it out (around halfway down)
 
 
 
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