Market Making Arbitrage Interview Intuition
Market making arbitrage interview intuition for spotting toy quote inconsistencies while accounting for costs, execution risk, and inventory.
Candidates comparing related quotes and fair values.
Arbitrage starts with inconsistency
In toy interviews, arbitrage-like reasoning appears when related prices imply incompatible values under the stated rules.
Costs can erase the opportunity
Before calling something arbitrage, include fees, spread, transaction costs, and any limits on execution.
Concrete example
If two contracts have identical payoff but one can be bought for 40 and the other sold for 45, the simple spread looks attractive before costs and execution constraints.
Execution risk matters
If you cannot trade both legs at the same time or size, the opportunity may carry risk rather than being riskless.
Inventory can remain
Partial fills can leave exposure. A market-making answer should mention what happens if only one side trades.
Common mistakes
Candidates often call any price difference arbitrage. The payoff relationship and execution assumptions have to support it.
Practice the pattern
Use the LeetQuidity curriculum and calibration to turn this topic into a focused practice plan.