Trainers & Games
Market-Making Game
Quote a two-sided market, manage your inventory, and try to end in the black against a flow of noise and informed traders.
You are the market maker
Your job: continuously quote a price you'll buy at (the bid) and a price you'll sell at (the ask). You earn the gap between them, the spread, but there's a catch. Some traders are just noise, but some are informed: they only trade when your price is wrong, and they pick you off. Quote too wide and nobody trades; too tight and the sharks eat you. Hold too much inventory and a price swing wipes you out.
- • 25 rounds. Each round a trader arrives and may hit your bid or lift your ask.
- • Set your fair-value estimate, your spread (how wide), and a skew (lean to buy or sell).
- • Goal: finish with the highest profit & loss, spread earned, minus what the sharks take, plus or minus your inventory's mark-to-market.
Learn how it works
Five worked examples. Read a couple before you dive in, try to answer first, then reveal the solution.
Quoting around fair value
You think a stock is worth about 100. You set:
- fair value = 100
- spread = ±2 (half-width 2)
- skew = 0
What are your BID and ASK? A noise trader arrives and buys. What do you earn?
Show solution
Your two prices sit either side of fair value:
- BID = fair − half-width = 100 − 2 = 98
- ASK = fair + half-width = 100 + 2 = 102
A noise buyer takes the price you offer, so they lift your ASK and you SELL at 102. If the stock really is worth 100, you just banked a +2 edge (half of your 4-wide spread). You're now short 1 unit of inventory. Collecting the spread from random, uninformed flow is exactly how a market maker earns a living.
Tight spread vs wide spread
The stock is worth about 100.
- Round A: you quote a tight ±0.5 spread → 99.5 / 100.5
- Round B: you quote a wide ±3 spread → 97 / 103
Which gets more fills, and what is the catch?
Show solution
Tight quotes (Round A) sit right next to fair value, so noise traders find them attractive and you trade a lot, but each fill only earns about 0.5 of edge, and an informed trader only needs the price to be off by a hair to pick you off.
Wide quotes (Round B) scare away most flow, so you trade less, but every fill earns about 3, and an informed trader needs a big mispricing before they can hurt you.
The whole game is choosing a spread wide enough to survive informed traders, tight enough to still attract noise.
Getting picked off by informed flow
You quote 98 / 102 around a fair value of 100. But the true value has secretly jumped to 105. An INFORMED trader arrives. What do they do, and what happens to you?
Show solution
The informed trader knows the truth is 105. Your ASK is 102, below 105, so to them it's a bargain. They lift your ASK and buy from you at 102.
You just sold something worth 105 for only 102: an instant −3 loss. This is adverse selection. Informed traders only ever trade when your price is wrong, and always on the side that hurts you.
The lesson: when the market may have moved and you might be behind, widen or skew your quotes instead of sitting still with a stale price.
Using skew to reduce a big inventory
After a run of sells you're short 5 units and the price is drifting up against you. Fair value is 100. Instead of a symmetric ±2 quote, you apply a skew of +2 (lean to buy). What are your new BID / ASK, and why does this help?
Show solution
Skew slides both of your prices in one direction. A +2 skew (lean to buy) shifts your quotes up:
- BID = fair + skew − half = 100 + 2 − 2 = 100
- ASK = fair + skew + half = 100 + 2 + 2 = 104
Now your bid is high (very attractive to anyone wanting to sell) and your ask is high (unattractive to buyers). So you're far more likely to BUY, which covers your short and pulls inventory back toward flat. Skew is your steering wheel, it lets you actively unload risk instead of just hoping the flow balances out.
Ending flat on the final round
It's round 25, the last one. You're long 4 units, fair value is 100, and your P&L swings with the price. Why does leftover inventory matter here, and what should you do?
Show solution
Inventory is really a bet on price. Long 4 means: if price drops 1 you lose 4, if it rises 1 you gain 4. Carrying that past the final round leaves your whole score hostage to one last random price wiggle.
To finish flat, skew hard to SELL (a negative skew). That drops your quotes, for example a −3 skew on a ±1 spread gives BID 96 / ASK 98. A cheap ASK of 98 pulls in buyers, so you sell off the long. It's fine to price through fair value just to dump the position. You want your ending P&L to be the spread you earned, not a coin-flip on the last tick.
What you'll learn
How market makers actually make money, earning the spread while dodging adverse selection and controlling inventory risk.