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Using Pre-Trade Markouts to Diagnose Information and Execution Timing

Article Quant Q&A · Author: option_vol
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Summary

The document explains how markout PnL measured before a trade can provide diagnostic information, even though the trader could not necessarily have executed at the earlier price. A negative pre-trade markout followed by a positive post-trade result may suggest that the strategy entered later than an opportunity, but the response highlights another use: detecting whether other participants appear to act on information first.

As an example, it describes options market makers coordinating activity across related instruments and venues. If a strategy consistently gives up PnL before its trades, that pattern can motivate investigation into who is moving ahead of it, including examination of venue-level activity where participant attribution is available. Pre-trade markouts therefore serve as a timing and information-leakage diagnostic, not as directly attainable historical PnL. The brief answer notes that markouts have many applications but does not provide a formal test or attribution method.

Key ideas

  • Pre-trade markouts can reveal price movement that occurs before a strategy executes.
  • Negative pre-trade PnL may indicate that other participants have acted on information earlier.
  • Related instruments and venue activity can help investigate who is trading ahead.
  • Historical pre-trade prices are diagnostic and do not imply the strategy could have executed there.

Tags

ExecutionMarket microstructureOptionsFutures
Full text
# Markout PnL why looking in the past


# Markout PnL why looking in the past












Most of the time to analyze a strategy people will take all the trades and look at the PnL a certain markouts. Yet I don't understand why so many people look at negative markouts?

What can infer from that since the price at which you bought was probably not available in the past right?

Because sometimes people look at markout at $-100$ms, $-1$mn, ... yet I don't really get what information it gives about the signal.

One way to think about it was: maybe it says if your trades are timed perfectly or not. For example if the markout PnL in the past is negative and in the future it is positive then probably that you missed the opportunity of buying the share earlier at a lower price?

## Answer by databento (score 1)

https://quant.stackexchange.com/a/78584

Too many use cases to enumerate.

One important thing it shows is if someone else is getting information earlier than you. A naive example is that some options market makers will time their sweeps in ES/SPX simultaneously or on any anonymous book(s) first so their rivals can't preempt the other leg(s). Maybe you have a good way to anticipate it but you'll see that you're giving up a lot of PnL before the trade. Then this can motivate an investigation to figure out who's coming out ahead of you by looking at legs on the venues with MPID attribution.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.