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The break-even spread when some traders know the answer

Asked at Jane Street

A stock is worth either \100oror$90,eachwithprobability, each with probability \tfrac12;priorfairvalueis; prior fair value is $95.Afraction. A fraction \alpha = 0.30ofthetradersyoufaceareinformed(theyalreadyknowthetruevalueandtradeaccordingly);theotherof the traders you face are **informed** (they already know the true value and trade accordingly); the other70%$ are uninformed and buy or sell at random, fifty-fifty, regardless of value.

You must post a bid and an ask that earn zero expected profit per trade, the competitive spread.

Derive the break-even bid and ask.

Your answer

This one is open-ended. Work it through, then check your reasoning against the full solution.

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