Timing of Inflows and Outflows

[Max88 10]

Hello traders,

 

Let me start with saying that I am an accountant, not a trader. I have several questions closely related to daily trading: how to calculate daily rate of return. Here is my situation. I have a list of daily trading-related information. For each day I have 4 numbers in the list: (1) market value of a position at the beginning of the trading day, (2) its market value at the end of the trading day, (3) total daily amount of inflows to this position (purchases), (3) total daily amount of outflows (sales). What I do not know is when the inflows and outflows occurred during the day. The timing is of course very important. As an example, consider a hypothetical position having value of $10 at the beginning of the day and value of $15 at the end of the day. There was a daily inflow of $3, no outflows. The daily profit is $15 - $10 - $3 = $2. If the inflow occurred, for example, at the beginning of the day, the rate of return would be 2/10 = 20%. If it occurred close to the end of the day, the rate of return would be 2/(10+3) = 15.7%. As I said, I have no information about the timing of the cash flows. In the absence of such information, I have to make some simplifying assumptions about the timing of the cash flows to estimate the daily rate of return. Here are my questions.

 

Do you think I would get the best estimate if I assume that all cash flows take place in the middle of the day?

For some days I know for sure when some inflows and outflows have occurred. For example, on a day when a long position was opened, the first transaction was clearly an inflow (purchase). On the day when a long position was closed, the last transaction was an outflow. For short positions it’s vice versa. My questions are: On a day when a long position is open, would it be realistic to assume that the majority of inflows occurred close to the start of trading activity? Similarly, on a day when a long position is closed, would it be realistic to assume that the majority of outflows occurred close to the end of trading activity?

This question is an extension of the previous one. Suppose that the market value of a position was small at the beginning of the day, and I have information that the total daily inflow was big (compared to the starting market value). Would it be realistic to assume that the majority of inflows occurred close to the start of trading activity? And if the market value of a position was small at the end of the day, and I have information that the total daily outflow was big (compared to the ending market value), would it be realistic to assume that the majority of outflows occurred close to the end of trading activity?

 

I am asking about “typical” daily trading scenarios (understanding there are always exceptions and anomalies). I would be most grateful if you could share your practical experience and answer my questions. Thank you in advance!

[silentdud 10]

Hello traders,

 

Let me start with saying that I am an accountant, not a trader. I have several questions closely related to daily trading: how to calculate daily rate of return. Here is my situation. I have a list of daily trading-related information. For each day I have 4 numbers in the list: (1) market value of a position at the beginning of the trading day, (2) its market value at the end of the trading day, (3) total daily amount of inflows to this position (purchases), (3) total daily amount of outflows (sales). What I do not know is when the inflows and outflows occurred during the day. The timing is of course very important. As an example, consider a hypothetical position having value of $10 at the beginning of the day and value of $15 at the end of the day. There was a daily inflow of $3, no outflows. The daily profit is $15 - $10 - $3 = $2. If the inflow occurred, for example, at the beginning of the day, the rate of return would be 2/10 = 20%. If it occurred close to the end of the day, the rate of return would be 2/(10+3) = 15.7%. As I said, I have no information about the timing of the cash flows. In the absence of such information, I have to make some simplifying assumptions about the timing of the cash flows to estimate the daily rate of return. Here are my questions.

 

Do you think I would get the best estimate if I assume that all cash flows take place in the middle of the day?

For some days I know for sure when some inflows and outflows have occurred. For example, on a day when a long position was opened, the first transaction was clearly an inflow (purchase). On the day when a long position was closed, the last transaction was an outflow. For short positions it’s vice versa. My questions are: On a day when a long position is open, would it be realistic to assume that the majority of inflows occurred close to the start of trading activity? Similarly, on a day when a long position is closed, would it be realistic to assume that the majority of outflows occurred close to the end of trading activity?

This question is an extension of the previous one. Suppose that the market value of a position was small at the beginning of the day, and I have information that the total daily inflow was big (compared to the starting market value). Would it be realistic to assume that the majority of inflows occurred close to the start of trading activity? And if the market value of a position was small at the end of the day, and I have information that the total daily outflow was big (compared to the ending market value), would it be realistic to assume that the majority of outflows occurred close to the end of trading activity?

 

I am asking about “typical” daily trading scenarios (understanding there are always exceptions and anomalies). I would be most grateful if you could share your practical experience and answer my questions. Thank you in advance!

 

Dear Max,

 

If by market value you mean portfolio value,your rate of return is just:

ROR =(MVend - MVbeg)/MVend

 

However, if by market value, you mean the FMV of the positions open as part of a larger portfolio, you can probably do this:

ROR = [(FMVclose + outflows)-(FMVopen+inflows)]/(FMVopen+inflows) = return for portfolio portion

 

- ideally you would have a different return for each instance or position, which you probably know

- It is not realistic to assume that the majority of inflows occurred at the start of trading activity.

- I was an accountant too.

 

MC

[Max88 10]

Dear MC,

 

Thank you very much for your response. I think the ROR formula you suggested is indeed the preferable one.

 

Concerning your note that “It is not realistic to assume that the majority of inflows occurred at the start of trading activity.”... I agree with this general statement. However my question was only about days when either (1) a position is opened or (2) a position’s value is small compared to the inflows. Is the assumption realistic in these situations?

 

Thank you again.

Max