Picked Off on a Stale Quote

Market Making

Adverse Selection

Easy

Fair value rises from

80

81

while your quote stays at

79.80/80.20

. A customer buys

100

units at your stale ask. Marking to the new fair value, what is your P&L?

Hint 1

You sold at the old ask; what is the asset now worth?

Hint 2

Compare the sale price with the new fair value.

Show worked solution

1. Per-unit loss
You sold at $80.20$ something now worth $81$ .
$80.20 - 81 = - 0.80$
2. Scale
Multiply by $100$ units.
$100 \times (- 0.80) = - 80$
3. Key idea
Stale quotes are the classic adverse-selection loss; fast fair-value updates matter more than wide spreads.

Answer: -80

1. Per-unit loss