# How does Hanson's Market Maker (LMSR) work?

If the market maker wants to quote a "current price", he can. The current price for outcome 1 is:

$$\mbox{price1} = \frac{e^{\frac{q1}{b}}}{e^{\frac{q1}{b}} + e^{\frac{q2}{b}}}$$

Why this is the case? Is it just some simple "see-saw" algorithm? Exert pressure on one side and it will simply radiate across into the corresponding +/- price change?

I am asking in the context of writing a simple market-making algorithm to offer bids and quotes (on a virtual market), but this seems too simple.

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Is this related to your university project? –  chrisaycock Apr 24 at 19:55
Its related to the algorithm I linked to in the question. –  user997112 Apr 24 at 20:33