Chapter 34 · PnL Attribution
You made money this month—do you know exactly why?
- Skills to practice
- Capital allocationRecognize failure
- 3D simulation
- None
Market scene
Lin's virtual position report shows $112 profit. He says, “Great signal; give it more capital next month.” Zhe asks how much the advance benchmark position would earn without the signal, and where savings while waiting for execution belong.
They unpack the same trade. Explained amounts total only 109, leaving 3 unreconciled. May those 3 dollars conveniently become “signal skill”?
Your decision
Choose how to explain and reconcile the $112 report.
Observe the result
| Component | Dollars |
|---|---|
| Advance benchmark position | +50 |
| Position beyond benchmark | +50 |
| Independent holding cash flow | +5 |
| Funding | −8 |
| Independently measured basis change | +12 |
| Decision-to-arrival price difference | +10 |
| Fees | −6 |
| Arrival-to-fill price difference | −4 |
| Unexplained difference | +3 |
| Total | +112 |
This is a teaching price bridge, not nine independent sources of skill. A positive component may merely be favorable on this occasion.
The mechanism
Hold 2 units, with an advance benchmark of 1. Decision price is 1,000, arrival 995, fill 997, and terminal valuation 1,050. Prices use the same definition, stripping separately listed basis changes.
First decompose prices. The benchmark times decision-to-terminal change contributes 50; the extra unit contributes 50. The decline from 1,000 to 995 while waiting improves two units by 10. Filling 2 above arrival costs 4. Total price PnL is 106, exactly two units from 997 to 1,050.
Then add independent holding cash flow 5, funding −8, basis 12, and fees −6, yielding 109. Independent observation is 112, leaving 3. Begin with an independent total and retain unexplained differences; using the same formula for totals cannot prove independent reconciliation.
- Fix benchmarks and classification boundaries before trading
- Build a price bridge with consistent prices and times
- Add nonoverlapping cash flows and costs
- Compare with independently observed net PnL
- Retain and investigate Residual
This covers one fixed-position interval. Size changes require separate intervals and retained ledgers; collapsing everything into an average price must not erase quantity changes.
What it is called
Real markets
Chapter 17 models holding costs. Deducting funding in net cash flow and again in Carry exaggerates costs. Check whether ledgers already include it.
Use the Chapter 17 spot/futures example. If price changes already include basis, listing Basis again duplicates it. Unify underlying/contract valuations before decomposition.
Chapter 15 separates spread, adverse selection, and inventory; Chapter 16 shows pool price changes. Business explanations may differ, but must reconcile to one account total. Fee income is not all profit.
Hands-on
Teaching long of 2 units, decision price 1,000, arrival 995, final 1,050; Carry +5, Funding −8, Basis +12, Fee $6. Separately reported basis is stripped from price; cash flows do not overlap.
Eight explained components109.00; residual3.00; nine-component total112.00 USD.
Course versionV1-docs; sourcep4:attribution；Chapter 34 / TRD-PRO-004
Records parameters and results at the click only; does not mean the experiment passed.View snapshot to save
Changing execution price while holding observed total fixed leaves the difference in residual first. Agree the benchmark before trading. Moving it is a sensitivity experiment, not permission to choose the prettiest retrospective decomposition. Signal does not mean proven skill.
- Calculate four price contributions from defaults and verify price PnL of 106.
- Add nonoverlapping cash flows and costs; verify explained 109 and residual 3.
- Change only fill price, keeping observed total fixed; explain the residual change.
- Write an attribution note defining the benchmark, component boundaries, and residual investigation. Do not infer benchmarks from results.
Change one variable
Three depths
- FoundationIf you profited this month, do you know why?Chapter 34
- AdvancedHow can PnL be split into direction, signal, Carry, Funding, Basis, execution, fees, slippage, and residual?Advanced F · Institutional trading
- InstitutionalHow should attribution determine capital increases and retirement?Institutional
Ask first whether totals are independent, then whether components overlap. Explaining totals is only the first step; signal quality still needs cross-sample validation. Retain every discrepancy.
The nine components are Directional, Signal, Carry, Funding, Basis, Execution, Fee, Slippage, and Residual. Specify quantity, currency, valuation time, sign, and fee inclusion for each. Fix benchmarks beforehand and aggregate multiple cash-flow intervals trade by trade; see Advanced F.
Continue the project: review nine-component bridges against independent ledgers.
Capital changes require sufficient net active-performance history, capacity, and stress-loss evidence. Direction-driven profits cannot make all added capital a reward for strategy skill. Persistent residual growth requires repairing data and valuation before allocation.
Continue the project: use attribution to decide capital or retirement.
Questions to take away
Chapter self-test
112 is independently supplied observed net PnL. The 3 difference stays Residual instead of being forced into a return component.
No. The contract requires nonoverlapping cash flows; the same applies to Basis, fees, and slippage.
No. It only describes this active-position outcome relative to the advance benchmark and may reflect luck or selection.
No. A long's improvement relative to arrival is positive. Signs depend on direction and bridge definitions.
One idea to take away
Separate direction, signal, carry, execution, and fees to distinguish skill from luck.
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If you profited this month, do you know why?
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