About this question
Medium · Market Microstructure · Quant Trader interview question · bayes-theorem, probability, market-making, adverse-selection
You are a market maker quoting a bid at 100 dollars. Informed traders only sell to you when the true value of the asset drops to 99 dollars. Uninformed traders sell randomly, regardless of the true value. Assume 20% of the total order flow comes from informed traders and 80% from uninformed traders. Given that your bid at 100 dollars has been filled, what is the probability that the true value of the asset is actually 99 dollars? This is a question about calculating a posterior probability using