MARKET MAKING INTERVIEW QUESTIONS

A market-making question is usually a conversation in disguise. You are being asked to put a number on uncertainty, then explain what would make you change your mind.

Market-making questions are not tests of whether you can recite an options textbook. The interviewer gives you an uncertain payoff and watches how you turn it into a price. A good answer has a visible sequence: clarify the contract, calculate a fair value, quote a two-sided market, then update when the information changes.

What market-making interview questions test

This is why a question can start with a coin or a die and end with "make me a market." The arithmetic is often simple. The judgment is in the quote and in the reasoning behind it.

A four-step method for a market-making question

1. Define the payoff. Ask what one contract pays, when it settles, and whether there are limits on size.
2. Find the fair value. Compute the expected payoff before worrying about a spread.
3. Quote both sides. Give a bid and an offer, not just the midpoint. A wider spread is reasonable when your estimate is uncertain.
4. Update deliberately. If someone trades with you or you learn something new, explain whether the information or your inventory changes the next quote.

Worked example: a simple event contract

Suppose a contract pays $100 if the sum of two fair dice is at least 10, and $0 otherwise. There are 6 favorable outcomes out of 36 (4+6, 5+5, 5+6, 6+4, 6+5, 6+6), so its fair value is about $100 × 6/36 = $16.67.

A sensible first quote might be 15 at 18: you buy at $15 and sell at $18. The midpoint is near your fair value; the spread leaves room for uncertainty and for the fact that the person trading with you may have noticed an error. If they immediately buy every offer, do not simply keep selling at 18. Pause, ask what could be wrong with the setup, and move your market higher if the trade itself looks informative.

Eight representative market-making interview questions

These are original practice prompts, not questions from any firm.

1. A fair coin pays $10 on heads and $0 on tails. What is its fair value, and what market would you make?

   Fair value is $5. A quote such as 4.75 at 5.25 is defensible. Explain that the spread covers uncertainty or position risk; if the coin is confirmed fair and size is small, it can be tight.

2. A six-sided die is rolled once. A contract pays $12 if the result is even. Price it.

   There are three even faces, so fair value is $6. Start near 5.75 at 6.25, then explain how your quote changes if the die may be biased.

3. You have bought ten contracts at 49. Your fair value is still 50. Do you quote the same market?

   Not necessarily. A long position creates inventory risk, so you may shade both prices down, for example 48.5 at 50, to make selling more attractive. State the direction before inventing a number.

4. A customer buys your offer immediately. What do you do next?

   First consider adverse selection: perhaps the customer has information you do not. Reduce or pull the offer, reassess the fair value, and only then re-quote. Do not assume every fast trade is random.

5. A game costs $4. It pays $10 with probability 0.3. Would you buy it at $3?

   The fair value is $3. At $3, expected profit is zero before any extra risk or costs. Say that you would need a discount below $3 to have positive expected value.

6. Two traders quote 48 at 52 and 49 at 51. Which is more confident?

   The 49 at 51 market is tighter, so it signals more confidence or willingness to take risk. It does not prove the midpoint is more accurate.

7. You estimate a probability at 60%, but your interviewer says they would buy at 65. What do you ask?

   Ask what information they are using and whether the contract has details you missed. Then explain whether that information changes your estimate. A market-making interview rewards a good clarification more than stubbornness.

8. A payoff is hard to value exactly in the time available. How do you proceed?

   Give a range, identify the assumption driving it, and quote wider around the range. False precision is worse than a well-explained approximation.

Common mistakes

• Giving one price. A market has a bid and an offer. State which side you are willing to take.
• Ignoring the trade. A customer who eagerly accepts your price may know something. Treat that as data.
• Skipping the payoff definition. A clean calculation on the wrong contract is still wrong.
• Overdoing the arithmetic. Use exact math when it is fast; otherwise give a defensible range and explain the assumption.

How to practice before an interview

Begin with expected value and basic probability until fair values come quickly. Then practice speaking: set a 60-second timer, calculate a midpoint, give a bid/offer, and name one fact that would change the quote. Our probability shortcuts guide helps with the first step, while the firm-format guide explains where market-making rounds usually fit in the process.