Market making interview games and questions

[emza0109]

Hi guys,

I have a few questions about interview questions/games from market making firms. Firstly I want to know what they are looking for when they ask the question like:
Make a market on the population of india or radius of earth etc etc...

The second question is in regards to market maker interview games they seem to often play games betting on for example the sum of the faces of a die. An example group interview game I faced was the following:
5 players each with 6 dice. Each person rolls the dice in a cup but keeps the faces hidden from everyone including themselves. Now make a market clearly this should be centered around the expected value: 105 but how wide should this spread be?

We then decide based on orders that the interviewer gives whether to buy or sell certain trades. My intuition is you should buy and sell on either side of the spread and try not to have a position. But anyone who has had any experience please step in, what exactly is the interviewer trying to gain from this?

Finally the interviewer reveals the value of the dice of one player after we have traded for a while, now make a market my intuition is the spread should be less than the initial situation and appropriately shifted as we have more information. For example he turns over say 12 then the expected is 96 and we should quote some spread around this value. what sort of response to this situation are they looking for?

Any help or advice as to what the interviewer is looking for would be much appreciated.

Mark

 

[Rich Forever]

Hey Mark,

Firstly I want to know what they are looking for when they ask the question like:
Make a market on the population of india or radius of earth etc etc...

The interviewer is looking for a confidence intervall from you around what you think is the true value of the variable. I.e. "make me a market on the money in my wallet". In this case you should make a quote large enough that you think the true value is with a confidence of around 90% within the range you give, say bid 5$ at 200$. That would mean you guess the true value is between 5$ and 200$. The less sure you are about the range in which the true value is, the larger you have to keep the spread. In above example, the best answer would be though that you'd deny to make a tradable market based on information your opponent has and you not (since he knows how much is in his wallet and surely could lift you at the price he'd make a buck or would just deny the trade). They look if you can assess the risk and set the spread accordingly to give enough risk premium on a variable that is uncertain. When you transfer that into daily business, you'll see illiquid securities tend to have a wider spread, because it is not sure if the market maker can sell the security he bought before the price moves significantly into one direction. Therefore, he has to set the spread wide enough to protect himself from directional risk.

So now I have a question for you, too:
I am about to attend a market maker group game like you described with the dice. Can you elaborate as detailed as possible what happened during that excercise?

How the interviewer gave orders and how are the candidates asked to do things?
How did they process after the first player liftig his cup? Do they actually ask the candidates to make markets around the expected value?

Thank you Mark.

Cheers

 

[steve134238]

Hey Mark,



The interviewer is looking for a confidence intervall from you around what you think is the true value of the variable. I.e. "make me a market on the money in my wallet". In this case you should make a quote large enough that you think the true value is with a confidence of around 90% within the range you give, say bid 5$ at 200$. That would mean you guess the true value is between 5$ and 200$. The less sure you are about the range in which the true value is, the larger you have to keep the spread. In above example, the best answer would be though that you'd deny to make a tradable market based on information your opponent has and you not (since he knows how much is in his wallet and surely could lift you at the price he'd make a buck or would just deny the trade). They look if you can assess the risk and set the spread accordingly to give enough risk premium on a variable that is uncertain. When you transfer that into daily business, you'll see illiquid securities tend to have a wider spread, because it is not sure if the market maker can sell the security he bought before the price moves significantly into one direction. Therefore, he has to set the spread wide enough to protect himself from directional risk.

So now I have a question for you, too:
I am about to attend a market maker group game like you described with the dice. Can you elaborate as detailed as possible what happened during that excercise?

How the interviewer gave orders and how are the candidates asked to do things?
How did they process after the first player liftig his cup? Do they actually ask the candidates to make markets around the expected value?

Thank you Mark.

Cheers

OMG, my best pal just had this group game in his interview yesterday. I am about to be interviewing with some trading firms as well. I really wonder what is the strategy for this game?
So rich forever, what exactly is your strategy? I don't quite get it, mind to explain more?

Are you saying the spread should be huge in the beginning, before we have any info about other players?

 

[Rich Forever]

OMG, my best pal just had this group game in his interview yesterday. I am about to be interviewing with some trading firms as well. I really wonder what is the strategy for this game?
So rich forever, what exactly is your strategy? I don't quite get it, mind to explain more?

Are you saying the spread should be huge in the beginning, before we have any info about other players?

Hey Steve,

in what country is your pal interviewing at the moment?

What exactly should I explain more detailed? Naturally, without any market information I'd set the spread wide enough if catching the true value would be the goal.

The thing is, I'm here without a strategy, too. That's why I'm so interested in what happens step by step in the game. I mean solely the actions that take place. I think I could guess what's the goal then. So it would be much appreciated if your pal would give you a detailed chronology what happend and what was asked and you post it here, so we can discuss whats the optimal way to handle this game.

Cheers

 

[steve134238]

Hey Steve,

in what country is your pal interviewing at the moment?

What exactly should I explain more detailed? Naturally, without any market information I'd set the spread wide enough if catching the true value would be the goal.

The thing is, I'm here without a strategy, too. That's why I'm so interested in what happens step by step in the game. I mean solely the actions that take place. I think I could guess what's the goal then. So it would be much appreciated if your pal would give you a detailed chronology what happend and what was asked and you post it here, so we can discuss whats the optimal way to handle this game.

Cheers

My pal and I are both interviewing in Chi, his is with one of the top firm (optiver/tibra etc). I am having mine on next wed (extremely worried, not gd with maths at all)

It isn't exactly the same, he said his was with cards, but it was very similar. The other difference is you can actually look at your cards, meaning you know what you have. Then the interviewer will flip the cards on the table and then you sell and buy based on the changes in expected values.

Hmmm, as for this problem, i have no clue why people aren't allow to look at their own dices. It wouldn't make sense, or would it?

PS: which firm you interviewing with?

 

[steve134238]

Hey Mark,



The interviewer is looking for a confidence intervall from you around what you think is the true value of the variable. I.e. "make me a market on the money in my wallet". In this case you should make a quote large enough that you think the true value is with a confidence of around 90% within the range you give, say bid 5$ at 200$. That would mean you guess the true value is between 5$ and 200$. The less sure you are about the range in which the true value is, the larger you have to keep the spread. In above example, the best answer would be though that you'd deny to make a tradable market based on information your opponent has and you not (since he knows how much is in his wallet and surely could lift you at the price he'd make a buck or would just deny the trade). They look if you can assess the risk and set the spread accordingly to give enough risk premium on a variable that is uncertain. When you transfer that into daily business, you'll see illiquid securities tend to have a wider spread, because it is not sure if the market maker can sell the security he bought before the price moves significantly into one direction. Therefore, he has to set the spread wide enough to protect himself from directional risk.

So now I have a question for you, too:
I am about to attend a market maker group game like you described with the dice. Can you elaborate as detailed as possible what happened during that excercise?

How the interviewer gave orders and how are the candidates asked to do things?
How did they process after the first player liftig his cup? Do they actually ask the candidates to make markets around the expected value?

Thank you Mark.

Cheers

The part i dun quite get is , once more information is revealed, shouldn't the spread become tighter/smaller? And when should we buy or sell? should we really only "buy and sell on either side of the spread and try not to have a position"? If so why?

 

[emza0109]

So since I posted this I have had more experience and I have a bit more of an idea as to how to perform in these games. So firstly Rich Forever you are correct that when they are asking to make a market on some random quantity like amount of cash in wallet then 90% confidence interval type strategy is what they are looking for.

In actual trading games (lets take the dice game) they are looking for something different I believe... firstly if you have no idea what the true number is as in this case you could make a really wide spread but no one would trade with you and you wont make any money.

The game worked like this:
First make a market on the number on dice bid/ask = 100/110 say.
Each player makes there market and they take the tightest spread as starting offers.
Then the interviewer starts filling in orders, e.g. client is looking to sell 10 contracts at 103 does any body want to buy and ppl make there orders. This goes on for a bit.

The strategy is to try and keep your position neutral but make a small profit. So as soon as there is a buy order above 103 you should take it how many you take depends on your position and how far about 103 it is.

He then might ask to make another market half way during the round. This market should then depend on your position and what price they were bought/sold at. So if I am long 10 at 103, I should skew my market say 98/105 or something to try and get back to neutral position.

When he reveals the value of his dice you can be in trouble depending on your position so you need to try and be as neutral as possible but still agressive so that you make money. They are looking to see that you respond to changing market conditions so obviously your market must move with how the expectation changes.

Finally if you also have an idea of what other players positions are you can consider trading with them if your markets 'match' eg my market is 100/105 since im long another might be 103/108 since he is short and as a compromise you both trade at 104 for example.

steve134238 I dont think it really makes a difference whether you see your own dice or not, this would only change the expectation of each player and I guess the problem there would be if a player's expectations shift far enough they wouldnt trade compared maybe to others so equal knowledge on all participants seems fair.

hope that helps....

 

[steve134238]

So since I posted this I have had more experience and I have a bit more of an idea as to how to perform in these games. So firstly Rich Forever you are correct that when they are asking to make a market on some random quantity like amount of cash in wallet then 90% confidence interval type strategy is what they are looking for.

In actual trading games (lets take the dice game) they are looking for something different I believe... firstly if you have no idea what the true number is as in this case you could make a really wide spread but no one would trade with you and you wont make any money.

The game worked like this:
First make a market on the number on dice bid/ask = 100/110 say.
Each player makes there market and they take the tightest spread as starting offers.
Then the interviewer starts filling in orders, e.g. client is looking to sell 10 contracts at 103 does any body want to buy and ppl make there orders. This goes on for a bit.

The strategy is to try and keep your position neutral but make a small profit. So as soon as there is a buy order above 103 you should take it how many you take depends on your position and how far about 103 it is.

He then might ask to make another market half way during the round. This market should then depend on your position and what price they were bought/sold at. So if I am long 10 at 103, I should skew my market say 98/105 or something to try and get back to neutral position.

When he reveals the value of his dice you can be in trouble depending on your position so you need to try and be as neutral as possible but still agressive so that you make money. They are looking to see that you respond to changing market conditions so obviously your market must move with how the expectation changes.

Finally if you also have an idea of what other players positions are you can consider trading with them if your markets 'match' eg my market is 100/105 since im long another might be 103/108 since he is short and as a compromise you both trade at 104 for example.

steve134238 I dont think it really makes a difference whether you see your own dice or not, this would only change the expectation of each player and I guess the problem there would be if a player's expectations shift far enough they wouldnt trade compared maybe to others so equal knowledge on all participants seems fair.

hope that helps....

I understand much more, yet i am also much confused by it. Thanks so much in advance though!!

Here are some of my quesitons (might sound stupid!)
1 How wide should the starting spread be? Is 100/110 good? Or is a tighter one better? Given that we do not know for sure the values of the dice, the risk is high, therefore should the spread be wider?

2 How do we keep our position neutral?

3 So if there is a client that wants to buy at 103 or above, we should sell?
How does our position affect this?

4 If you change the bid ask to 98/105, that means you are trying to sell? Because its cheaper for clients to buy?

5 under what circumstances you want to short/long? is the purpose to maintain a neutral position?

Sorry in advance if i sounded stupid or if none of this makes sense, thank so so much for spending the time on replying.

PS: Are you working as a prop trader now, if so , how is it? stressful?? also how is the pay?

 

[emza0109]

1 How wide should the starting spread be? Is 100/110 good? Or is a tighter one better? Given that we do not know for sure the values of the dice, the risk is high, therefore should the spread be wider?

2 How do we keep our position neutral?

3 So if there is a client that wants to buy at 103 or above, we should sell?
How does our position affect this?

4 If you change the bid ask to 98/105, that means you are trying to sell? Because its cheaper for clients to buy?

5 under what circumstances you want to short/long? is the purpose to maintain a neutral position?

Sorry in advance if i sounded stupid or if none of this makes sense, thank so so much for spending the time on replying.

PS: Are you working as a prop trader now, if so , how is it? stressful?? also how is the pay?

1) how wide is a hard question and is probably a bit subjective. You should make your spread as wide as possible but no so wide that no one will trade from memory 100/110 is reasonable in that most interviewees were around that.

2) Keeping position neutral is hard since it depends on the orders that come in. The only advice is be aware of your exact position long/short and at what price they were bought/sold that way you can obviously tell what trades would be profitable eg if you are long 5 at 103 and an order comes in at 105 you could try and sell 5 to make a 2 point profit per contract but you probably wouldnt try to sell 10.

3) So whether we want to trade with a client with an order to buy at 103 (i.e. we would be selling) totally depends on our position. The expected price is 105 so selling at 103 would be a bad trade unless our position is long some number of contracts say at 102. We should probably only close out our position since once we are neutral 103 does not seem so attractive.

4) yes correct you are just shifting your market with your position. Not only is it cheaper to for clients to buy but more expensive for them to sell. So if you are long you are less inclined to buy.

5) sorry I dont quite understand...

And I'm not working as a prop trader at the moment, but I have finally landed a position...

 

[wesRobAndSin]

Great responses mtak0114 and Rich Forver! Haven't been able to find how to answer questions like these anywhere. Your answers were extremely informative and helpful.

 

[lalala12389]

1) how wide is a hard question and is probably a bit subjective. You should make your spread as wide as possible but no so wide that no one will trade from memory 100/110 is reasonable in that most interviewees were around that.

2) Keeping position neutral is hard since it depends on the orders that come in. The only advice is be aware of your exact position long/short and at what price they were bought/sold that way you can obviously tell what trades would be profitable eg if you are long 5 at 103 and an order comes in at 105 you could try and sell 5 to make a 2 point profit per contract but you probably wouldnt try to sell 10.

3) So whether we want to trade with a client with an order to buy at 103 (i.e. we would be selling) totally depends on our position. The expected price is 105 so selling at 103 would be a bad trade unless our position is long some number of contracts say at 102. We should probably only close out our position since once we are neutral 103 does not seem so attractive.

4) yes correct you are just shifting your market with your position. Not only is it cheaper to for clients to buy but more expensive for them to sell. So if you are long you are less inclined to buy.

5) sorry I dont quite understand...

And I'm not working as a prop trader at the moment, but I have finally landed a position...

These are great explanations. I was wondering what happens when the expected value of the market maker is in between the bid/ask price of the market maker. Since he will not be buying or selling because either the price is too low or too high.