Spread vs Edge in Market Making Interviews
Spread vs edge in market making interviews, with fill probability, adverse selection, inventory cost, and why wide quotes do not guarantee profit.
Candidates who confuse quoted spread with expected trading edge.
Spread is quoted width
The spread is the distance between bid and ask. It describes your quoted market, not the profit you are guaranteed to earn.
Edge is expected value after fills
Edge depends on whether trades happen, who trades, how informed they are, and what inventory risk you take after the fill.
Concrete example
A 10-point spread sounds large, but if you only get filled when your fair value is wrong by more than 10 points, the expected edge can still be poor.
Fill probability matters
A very wide quote may avoid bad trades but also receive no trades. A tight quote may receive flow but expose you to selection and inventory risk.
Inventory cost matters
Even a favorable fill can create a position that is costly or risky to unwind in later rounds.
Common mistakes
Candidates often say wider is safer without discussing lost flow, or tighter is better without discussing adverse selection.
Practice the pattern
Use the LeetQuidity curriculum and calibration to turn this topic into a focused practice plan.