What is market making (With Examples): Interview Answer Guide 2027
This market making interview question is tangible with a quote. A hypothetical maker quotes $99.95 bid / $100.05 ask: buying from sellers at $99.95 and selling to buyers at $100.05 captures a $0.10 spread per round trip. Repeated thousands of times daily it compounds — unless informed flow picks you off, which is why quotes constantly adjust.
What This Market Making Interview Question Tests
A market maker is a liquidity provider: instead of betting on direction, they continuously quote a two-sided market — a bid price at which they'll buy and a slightly higher ask price at which they'll sell — and earn the bid-ask spread on the flow that trades against them. Exchanges and venues often designate market makers with obligations to quote; in return they get fee rebates or priority.
How to Answer This Market Making Interview Question
Work a hypothetical day. You quote XYZ at $99.95 / $100.05 — a $0.10 spread. Morning flow: you buy 10,000 shares from sellers at $99.95 and sell 10,000 to buyers at $100.05 — flat inventory, $1,000 of spread captured. Afternoon: a wave of sellers hits; you're now long 50,000 shares into a falling market — inventory risk realized.
Your defenses kick in: skew the quotes down ($99.80 / $99.90) to attract buyers and discourage sellers, working the inventory flat; hedge the residual if it's an options book; and if volatility spikes on news, widen to $99.70 / $100.10 because the chance your quotes are stale just rose. End-of-day math: spread earned, minus the loss on the accumulated long, minus hedging costs = the day's P&L. That loop — quote, accumulate, skew, hedge — is the entire job description.
Common Mistakes on the Market Making Interview Question
- Calling it risk-free profit. The spread is gross revenue; adverse selection and inventory losses are the costs. “Free money” framing reveals zero understanding of the business.
- Ignoring adverse selection. The deepest risk isn't volatility — it's that your counterparty knows something you don't. Every market making answer needs the informed-trader problem.
- Forgetting the technology dimension. Modern making is latency, data, and automation. Describing it as a human shouting quotes belongs to a different century.
This is the kind of technical question that commonly decides interview rounds — candidates report that one hesitant or rambling answer here can end the process on the spot. Practice saying your answer out loud until it sounds calm, structured, and confident.
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FAQ
How do market makers actually make money?
Primarily the bid-ask spread on customer flow, plus exchange rebates for providing liquidity — high volume on thin margins, minus losses to informed traders and hedging costs.
What is adverse selection in market making?
Losing systematically to better-informed counterparties, who trade against your quotes only when they're stale in their favor. It's the central cost of the business and the reason spreads exist.
Why do spreads widen in volatile markets?
Because the risk of quotes going stale (adverse selection) and of holding inventory both rise with volatility — wider spreads compensate the maker for the extra risk.
What's the difference between a market maker and a proprietary trader?
Market makers profit from facilitating flow (spread and rebates) while staying neutral; prop traders profit from directional bets. Interview format may vary by role and region — check the official careers page for the current process.
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