"Make me a market"

[abl]

Hi,

I have an interview scheduled with a prop trading firm next week and was just trying to understand how to answer the "Make me a market" type questions.

From some basic googling, I realize that the immediate answer is to calculate in your mind what you think would be a fair answer and then respond by building a spread around it.

For example, lets say the question was "Make me a market on a pen."

If I thought that the fair price would be around $1 but was not sure if it could go as low as $0.5 or as high as $1.5, I would respond with "Buy at $0.5 and Sell at $1.5".

Now I am trying to understand what the interviewer's follow-up questions can be? How will the interview progress after this?

I am sure responses would be useful to a lot of aspiring traders.

 

[kimo'sabby]

Hi,

I have an interview scheduled with a prop trading firm next week and was just trying to understand how to answer the "Make me a market" type questions.

From some basic googling, I realize that the immediate answer is to calculate in your mind what you think would be a fair answer and then respond by building a spread around it.

For example, lets say the question was "Make me a market on a pen."

If I thought that the fair price would be around $1 but was not sure if it could go as low as $0.5 or as high as $1.5, I would respond with "Buy at $0.5 and Sell at $1.5".

Now I am trying to understand what the interviewer's follow-up questions can be? How will the interview progress after this?

I am sure responses would be useful to a lot of aspiring traders.

$0.45 is all you will get off me, but I am willing to do better than average volume at that price.

 

[abl]

$0.45 is all you will get off me, but I am willing to do better than average volume at that price.

Thanks for the reply kimo'sabby!

I understand this is the start of a negotiation.

Since the bid that I am getting is lower than my own initial bid(of $0.5), I am now thinking maybe there is some information about the pen that I don't have. It is likely that the true value of the pen is lower than what I thought it would be. Also since the bid of $0.45 is at a 'higher than average volume' it is likely that it is discounted from the true value. That said, I only have one reference point to revise my quote so I will only revise it marginally.

My revised quotes would be:
Bid at $0.4, Offer at $1.2
(I have intentionally lowered my spread from $1 to $0.8)

Am I doing this right?