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Bid-Ask Spread and Market Making Brainteaser
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#236easyFinance

Bid-Ask Spread and Market Making

Time Limit: 2sMemory: 256MB
Optiver
Part of:Finance & Markets → Market Mechanics

Problem

A market maker quotes a bid of $49.90 and an ask of $50.10 for a stock.

  1. What is the bid-ask spread?
  2. If the market maker buys 100 shares at the bid and sells 100 shares at the ask, what is their profit?
  3. If the market maker believes the true value is $50.00, what is their expected profit per trade against an uninformed counterparty?
  4. Why might a market maker widen the spread?

This problem covers fundamental concepts that every quant trader is expected to know.

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Think through the problem, use the hints if stuck, and reveal the solution when ready.

Hints

Hint 2 (reveal previous hint first)
Hint 3 (reveal previous hint first)