Using markouts to set your spread
Asked at Jane Street, IMC
You want to set your bid-ask spread from data. For every fill you record where the mid-price is a short time later (say one second, ten seconds, one minute) relative to your trade price. This is the markout.
How do markouts measure adverse selection, and how do you turn them into a spread?
Your answer
This one is open-ended. Work it through, then check your reasoning against the full solution.