As discussed earlier, reporting the daily P&L is an important activity of the trade lifecycle. In addition to knowing today’s P&L however, many participants would like to know how the gain or loss in P&L actually happened. A special report known as P&L attribution or P&L explained can provide this information.
Once the P&L has been calculated and compared with the previous period’s calculation, it is instructive to piece together the factors that caused the changes in P&L.
Reporting the P&L attribution has at least three benefits. For simplicity, we will assume the P&L is calculated daily and the P&L attribution reports between two consecutive trading days.
14.1.1 Catches mistakes
The P&L attribution puts the trade’s P&L in context with other trades and with the same trade done the previous day.
In context with other trades: various mistakes in booking will be detected by putting a trade in context with its peers. For example, if a new trade was erroneously entered with 10 times more notional, then it will have an abnormally large P&L compared to similar trades.
In context with previous day: suppose a piece of market data was incorrectly used in the P&L calculation today. Then the P&L between today and yesterday would show a much higher or lower jump than expected, alerting the reader to a possible problem.
P&L is the headline measure of how an individual trader, desk or division is doing, but the trader’s personal ...