Opening market-making exercise in trading interviews.
Make a market on two dice
The question
Make me a market on the sum of two fair dice.
Have a go before you open the solution. If you are stuck after a few minutes, the first paragraph below is usually enough of a nudge.
Show the worked solution
The answer
Quote around the fair value of 7, for example 6.5 at 7.5, then adjust as you are hit or lifted.
Fair value is 7. Your quote should straddle it, and its width should reflect your uncertainty and the size you are showing.
On a known distribution like this, uncertainty is low, so a tight market such as 6.5 at 7.5 is defensible. Quoting 2 at 12 signals you do not understand what a market is.
Then expect the interviewer to trade against you and ask you to requote. If they buy at your offer, you are short and should shift your quote up, not hold it out of pride.
The whole exercise measures two things: can you compute a fair value, and do you update when someone with possibly better information trades with you.
What it is testing
Fair value, spread discipline and willingness to update after a trade.
Try these next
The informed counterparty
StandardYou quote a market on a coin flip paying 100 for heads. Your counterparty may have seen the coin. How should your quote change?
You are long and you do not want to be
StandardYou have been lifted repeatedly and are now long well beyond your limit. What do you do with your quote?
How wide should the spread be?
HardWhat determines how wide you quote?
Price something you cannot look up
HardMake a market on the number of petrol stations in the country you are sitting in.
Preparing properly
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