Market making game
Quote a two-sided market, get picked off and learn from the flow. You set a bid and an ask on a contract whose value depends on dice or cards, while noise traders and an informed insider decide whether to trade with you.
06 / TRADING INTERVIEW
Market-making game
Quote a two-sided market. Get picked off. Learn from the flow.
About two arrivals in five are the insider. Changing the game or the flow starts a new game.
Dealing…
The contract settles at the sum of all four dice, $4 to $24. 0 of 3 public dice revealed.
How the game works +
Four fair six-sided dice are rolled. The contract settles at their sum, so its fair value before any information is $14.00. You make 8 markets; after every 2 one more public die is revealed, up to three. The fourth die is seen only by an insider and is revealed at settlement. Each market meets one counterparty. With probability 40% (standard flow) it is the insider, who buys your ask if their expected value is above it, sells your bid if it is below, and otherwise passes. Otherwise it is a noise trader who buys or sells at random and deals less often as your market widens: always at $1.00 wide or less, falling to 25% at $4.00. Every trade is for your full quoted size. P&L splits exactly into spread captured (your price against public fair value), adverse selection (the insider’s die against public fair value) and luck (dice not yet seen by anyone). This is a fictional practice game with made-up counterparties, loosely inspired by the Glosten–Milgrom model of trading against informed flow.
How to use it
Enter a bid and an ask around your estimate of fair value. As public dice or cards are revealed, fair value changes and you quote again. Every counterparty is unmasked at settlement, so you can see whether each fill came from noise or from the insider.
What it teaches
A wide market protects you from the insider but scares off uninformed flow, and a market that never trades earns nothing. A narrow one collects the spread from noise traders but gives edge to anyone who knows more. Even a pass is information: the insider only passes when their value sits inside your market.
Inventory matters too. Leaning your quotes against your position helps you avoid being stuck with a large exposure. Balancing spread capture, adverse selection and inventory is the core job of a market maker.