Akuna Capital office

How to play 'Make me a Market'

Published February 18th 2024
Last edited May 8th 2024

The "Make Me a Market" game, often integrated with Fermi questions or Guesstimates, is a critical component of trading interviews. Here’s a detailed and complete guide to excelling in this challenging but fun part of the trading interview process.

1. Understanding the Structure of the Game

The "Make Me a Market" game in trading interviews typically unfolds in several stages:

  • It begins with a Fermi-style estimation question where you provide an estimate of a quantity with limited information.
  • You are then tasked with making a market on this estimated quantity, quoting bid (buy) and ask (sell) prices, reflecting your confidence in the estimate.
  • The interviewer may choose to buy (accept your ask price), sell (accept your bid price), or (in some cases, depending on the variant of the game) refrain from trading.
  • Based on the interviewer's actions, you must adjust your bid and ask prices intelligently.
  • After a series of trades and adjustments, you calculate your net position (long or short) and total profit or loss.
  • Finally, you may be asked to reflect on your approach, decisions, and adjustments made during the game.

Now, let's tackle the different stages of the game one-by-one.

1.1 Fermi Questions

Fermi questions are a staple in interviews for trading roles that require strong problem-solving and estimation skills. They involve making estimates for complex questions with limited direct information, relying instead on logical deduction and reasonable assumptions.

1.1.1 Nature and Purpose of Fermi Questions

  • Critical Thinking: These questions test your ability to think critically about problems, breaking them down into more manageable components.
  • Estimation Skills: They require you to make intelligent guesses, often involving large numbers or quantities, and to quantify uncertainty in a logical way.

1.1.2 Approach to Tackling Fermi Questions

  • Problem Decomposition: Start by breaking down the question into smaller, more manageable parts. If the question is to estimate the number of gas stations in a city, start by considering the city's population, the average number of cars per household, and so forth.
  • Logical Assumptions: Make reasonable assumptions to fill in the gaps where direct data is unavailable. Each assumption should be logical and justifiable. For instance, you might assume a certain percentage of the population drives based on national averages.
  • Range Estimation: Provide a range that reflects your confidence level. A wider range indicates more uncertainty. It's often better to provide a range (e.g., between 10,000 and 15,000) rather than a specific number, as it demonstrates your understanding of the inherent uncertainties in estimation problems.
For practice, make sure to take a good look at Fermi: Piano Keys, Fermi: Piano Tuners and Fermi: Tennis Balls.

1.2 Market Making in the Game

In the "Make Me a Market" game, you'll be acting as a market maker, quoting prices for the quantity you're estimating in response to the Fermi question. This exercise tests your ability to synthesize information from the estimation phase and use it to make informed decisions under uncertainty.

1.2.1 Initial Market Setup

  • Quoting Prices: After making your estimate based on the Fermi question, set your initial bid (buy) and ask (sell) prices. Your bid price should be lower than your ask price, and the range between them (the spread) should reflect your confidence in your estimate.
  • Spread Considerations: The width of your spread is critical. A wider spread might suggest less confidence in your estimate and protects you in the case you are uncertain about the quantity. However, it could also discourage the interviewer from trading if they perceive the spread as too wide. Conversely, a narrow spread suggests confidence but comes with higher risk if your estimate is off.

1.2.2 Interpreting Actions in the Market

  • Market Dynamics: Your quoted prices set the stage for the interviewer's actions. They may choose to buy, sell, or not engage in a trade based on the prices you've quoted.
  • Feedback Mechanism: Each action or inaction by the interviewer provides feedback. Accepting your bid or ask price indicates their view on your estimate, while choosing not to trade suggests that they find your quoted range reasonable.

1.2.3 Adjusting the Market

  • Responsiveness: Be prepared to adjust your bid and ask prices based on the interviewer's actions. If they buy, they might believe the actual number is higher than your estimate. If they sell, they might believe it's lower.
  • Balanced Adjustments: Any adjustments should be made carefully, ensuring you don't overreact to a single trade. Maintain a balance between being responsive to feedback and sticking to your initial estimation and risk management strategy.

2. Strategies for Success

2.1 Dealing with a Buy (Interviewer Accepts Your Ask Price)

When the interviewer accepts your ask price, they are essentially buying at the highest price you're willing to sell. This action typically suggests that they believe the actual value might be higher than your current estimate.

2.1.1 Higher Estimate Implication

  • Market Perception: The buy indicates that the interviewer perceives your upper limit as potentially too low. They see room for the actual value to be higher.
  • Psychological Aspect: This action can also be a psychological strategy to see how confidently you're backing your estimates and whether you're quick to reconsider your stance based on market behavior.

2.1.2 Response Strategy

  • Critical Reassessment: Pause and critically reassess your estimate. Reflect on the assumptions and logic that led to your initial numbers. Were there overlooked aspects or conservative estimates that might need revision?
  • Gradual Adjustment: If you decide to adjust your prices upwards, do so gradually. Overreacting to a single trade can lead to significant mispricing.
  • Risk Management: Even as you adjust your prices, keep risk management in mind. The new spread should still protect you against unfavorable moves while reflecting your updated estimation and confidence level.

2.2 Dealing with a Sell (Interviewer Accepts Your Bid Price)

When the interviewer accepts your bid price, they are essentially selling at the lowest price you're willing to buy. This action typically suggests that they believe the actual value might be lower than your current estimate.

2.2.1 Lower Estimate Implication

  • Market Perception: The sell indicates that the interviewer perceives your lower limit as potentially too high. They anticipate the actual value might fall below your current estimate.
  • Strategic Reflection: Consider this a cue to revisit your estimation process. What factors might have led to an overestimation? Is there data or logic that you initially overlooked or misinterpreted?

2.2.2 Response Strategy

  • Reevaluation: Reevaluate your estimation, scrutinizing each step and assumption for potential overestimations.
  • Measured Reduction: If you decide to adjust your bid and ask prices downward, ensure the adjustment is measured and reflective of a thoughtful reassessment, not a knee-jerk reaction to the trade.
  • Preserving Credibility: While adjustments may be necessary, ensure they are backed by solid reasoning. Maintaining your credibility is crucial, especially in an interview setting.

2.3 Dealing with Non-Trade

A non-trade situation, where the interviewer chooses not to engage with your quoted prices, can be nuanced and requires a keen understanding of its implications.

Note that some interviewers don’t play the game with the non-trade option and will just keep trading once your quote range contains the actual number to see how you respond to this. If this is the case try to exploit this by quoting around your estimate in a way that gets your interviewer to buy and sell in roughly equal amounts so that you profit from the difference.

2.3.1 Estimate Within Reasonable Range

  • Implicit Validation: The lack of trade can often be interpreted as implicit validation of your estimate and quoted range. The interviewer likely finds your spread reasonable and believes the true value falls within it.
  • Strategic Patience: In some cases, maintaining your current market without immediate adjustments might be the best course of action, especially if you're confident in your estimate and the logic behind your spread.

2.3.2 Response Strategy

  • Reflect on Market Engagement: If non-trades are consistent, it might be worth considering whether your spread is too wide, potentially discouraging engagement.
  • Subtle Adjustments: You might opt for subtle adjustments to your spread to test the market. This could invite engagement, providing more insights into the interviewer's perspective.
  • Maintain Readiness: Be ready to justify your position and any adjustments you make. The interviewer might be adopting a wait-and-see approach, assessing how you react (or don't react) to the absence of trades.

2.4 General Strategy and Mindset

Throughout the game, maintaining a strategic mindset and a balanced approach is key. Here are some overarching strategies:

  • Vigilant Record-Keeping: Keep a (mental) record of each interaction, trade, and non-trade. This data is crucial for adjusting your strategy during the game and any post-hoc assessment after the game is finished.
  • Reflective Position Awareness: Continuously assess your net position. Know whether you are net long or short in the asset based on the trades executed, and understand how this affects your risk exposure and potential profitability.
  • Dynamic Strategy: Stay dynamic and adaptable. The game is not static, and neither should be your approach. Be ready to adjust your strategy based on both the explicit feedback (trades) and (possibly) implicit feedback (non-trades) from the interviewer.
  • Pay Attention to Mistakes: If the interviewer is showing irrational behavior (making mistakes) and you see an opportunity to consistently exploit this, do so immediately and lock in that profit.

3. Trade and Position Management

The management of your trades and understanding your position at any given moment are critical in demonstrating your grasp of market dynamics and your capability to handle a real trading environment.

3.1 Keeping Track of Trades

Every trade executed during the game changes your position and potentially your strategy. Accurate record-keeping is essential for understanding your current standing and for post-game analysis.

3.1.1 Record Keeping

  • Detailed Logging: For every trade, log the quantity, the price, and whether it was a buy or sell. This log will be indispensable for calculating your net position and ultimately your profit or loss.
  • Systematic Approach: Develop a systematic approach to logging trades, ensuring no transaction is overlooked. This might involve a simple ledger format where buys and sells are clearly marked.

3.1.2 Position Awareness

  • Real-Time Position Tracking: Keep a running tally of your net position. Know at all times whether you are net long (more buys than sells) or net short (more sells than buys).
  • Position Implications: Understand the implications of your net position. Being net long means you'll benefit if the actual value is higher than your current estimate, while being net short means you'll benefit if it's lower.

3.2 Calculating Profit

The ultimate goal of market making is to generate profit through the spread while managing the risk. Understanding how to calculate your profit (or loss) is crucial in evaluating your performance in the game.

3.2.1 Profit Mechanics and Common Variations

  • Spread Profit: Profit in market making generally comes from the spread – buying at lower prices (your bid prices) and selling at higher prices (your ask prices).
  • Quantitative Calculation: Calculate the profit from each trade by multiplying the quantity by the difference between the buying and selling prices. Sum these up for all trades to get the total profit.
  • Common Variations: Note that some interviewers will intentionally make mistakes and let you profit from them in an attempt to see whether or not you will try to actively exploit or notice an inconsistent or irrational trend in their trading behavior. On the other hand some interviewers will also try to profit from any mistakes you make and question you about this after the game.

3.2.2 End-of-Game Calculation

  • Aggregate Profit: At the end of the game, you should be able to present the aggregate profit or loss from all your trades. This involves summing up the profits (or losses) from each individual trade.
  • Consideration of Final Position: If the game ends and you have a net position (either long or short), you may be asked to calculate the theoretical profit or loss based on the final estimated value of the asset. This final step shows your ability to understand and articulate the outcome of your trading strategy.

3.3 Post-Game Analysis

After the game, it's not just about knowing your profit or loss, but also understanding the why behind it. This analysis can provide deep insights into your decision-making process and market understanding.

3.3.1 Analyzing Trade Decisions

  • Review Each Trade: Look back at each trade and analyze the decision-making process behind it. Were your assumptions valid? Was your response to the interviewer's actions appropriate?
  • Understanding Market Signals: Reflect on how you interpreted the interviewer's actions or inactions. Did you read the signals correctly? How did these interpretations influence your subsequent decisions?

3.3.2 Reflecting on Strategy Adjustment

  • Adaptability Assessment: Evaluate how adaptable your strategy was. Did you effectively balance the need to adjust your market with the risk of overreacting to individual trades?
  • Spread Management: Analyze how well you managed your spread throughout the game. Was it too wide, potentially discouraging trades, or too narrow, exposing you to undue risk?

4. Preparation

Practice and Feedback

  • Simulated Scenarios: Engage in mock interviews and trading simulations to get comfortable with the dynamics of the game and handling Fermi questions. To work on your trading intuition play our market making game.
  • Constructive Criticism: Seek feedback on your performance, focusing on how you manage your trades, adjust your market, and calculate profitability.

Reflective Learning

  • Learning from Each Interaction: Treat trades and non-trades as learning opportunities. Analyze these to understand the interviewer's perspective and to refine your strategy.
  • Iterative Improvement: Continuously refine your strategies based on feedback and reflections from each practice session.
By thoroughly understanding the market making dynamics and practicing your approach frequently in mock interviews you will be able to play the "Make Me a Market" game with the confidence necessary to succeed.

Note that there are many different variants of this game and many firms play it slightly differently. This guide however should give you a basic understanding and overview of how to structure your approach. Remember, success in this game is not just about finding the right answer but about demonstrating a structured, logical, and adaptable approach to problem-solving, market making, and risk management.