Quant Club and Citadel Host Market Making Game

Last month, 150 students gathered to test their financial prowess at a Market Making Game. The event was hosted by Carnegie Mellon University’s Quant Club and sponsored by Citadel Securities, one of the world’s biggest market makers. It brought together undergraduate and graduate students from all across the university.

The game was a thought-provoking mixture of estimation, optimization and negotiation. Teams of participants took on the role of market makers as they tried to maximize their capital by trading with other teams.

Twenty-five teams started the game with contracts and some (fake) cash. Throughout five rounds of play, teams had to use their cash to buy contracts or sell contracts to make more cash. However, there was a catch. They didn’t actually know the value of the contracts. Instead, each round rotated through questions about Citadel securities, the economy, mathematical puzzles and general trivia that teams had to solve to reveal the price of the contracts.

“These were tricky problems,” said Bill Hrusa, mathematical sciences professor and faculty advisor to the Quant Club. “For example, one probability-focused question asked the number of times you need to roll a 6-sided die in order that the product is going to be bigger than 20200201, the date of the event.”

Hrusa was not surprised to see teams using a variety of strategies throughout the game.

One of those strategies is to visit the liquidity station. The liquidity station knows the hidden value of all the contracts. Teams could trade with the station once per round to gain information on the true value of their contracts.

“They can assume we will make the choice that maximizes our profit or minimizes our loss,” said Quant Club President Tony Wang, who oversaw one of the stations. Essentially, if the liquidity station buys a contract, the team then knows they undervalued the contract. If the station sells the team a contract, the team knows it overvalued the contract.

It’s a lot of uncertainty, but that’s what makes the game all the more exciting.

“The most challenging part is the uncertainty that comes from not knowing the exact value of the contract and having to trade it anyways if you want any chance to make money,” said Dallas Foster, senior computational finance major. He learned a similar lesson during his summer internship as a trader with Transmarket Group in Chicago. “It wasn’t about whether the traders knew they were 100% right but whether they had a good feeling that they were more right than others. That line of thought applied to the game as well.”

Fellow computational finance senior Jason Ren agreed. His team managed that uncertainty by splitting up into different roles based on their strengths. Shengming Luo, a Ph.D. candidate in statistics, and Justin Cao, a computational finance senior, solved the problems to find out the value of the contracts; Ren and mathematical sciences junior Wynn Huang drove hard bargains as the team’s traders; and computational finance junior Cindy Ding also traded with other teams and managed the contracts and communication for the team.

The team took home first prize, ending the day with a 10% return on their contracts.

Ren’s favorite part about the event was interacting with other teams. “With a room of 150 people, it can get pretty intense,” he said. “Multiple groups are trying to compete at the same time. It almost felt like a trading floor where people are shouting on the floor and the phone.”  

The Quant Club has been hosting the Market Making Game for a few years, but this was their first university-wide event. Former Quant Club executive Max Chen brought the game to the club after participating in a trading competition at another university. Chen is currently a machine learning master’s student at CMU and will join Citadel as a trader when he finishes his program. He wrote all the questions for the event and, along with Wang, helped organize the partnership with Citadel. Citadel representatives gave advice to teams during the game and chatted with students at a pre-event lunch.

The event was undoubtedly a success for the Quant Club, which looks forward to hosting it again next year. “I think the Market Making Game is my favorite Quant Club hosted event,” said Lily Qiao, a computational finance junior and club executive. “It is a lot of fun because it’s so interactive. It’s not just based on problem-solving but teamwork, too.”