Reading Your Counterparty
You quote a market, someone trades against it, and you must requote. That moment is the whole of this section applied at speed, and it is where interview market-making games are won and lost.
A fill is evidence, and its strength varies
Adverse selection and the spread showed that a buy order raises the probability of the high state. How far it raises it depends entirely on the likelihood ratio, which is another way of saying: on who you think just traded with you.
At one extreme, a counterparty you believe is purely informed. A fill from them is close to being told the answer, and your price should move most of the way there. At the other, a counterparty rebalancing a portfolio on a schedule. Their fill carries almost nothing, and moving your price for it is inventing information.
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