This is regarding a simple equity trading system, long and short.
I am trying to reconcile monthly performance of a system with the actual movements of the underlying securities, so i can get faith in the numbers posted by C2 - and i am having some trouble with that. There is nothing in the general explanations on C2, unfortunately. Can someone pls explain how the monthly numbers are calculated? Is it the mark-to-market of the underlying securities from the close of the last trading day of the month through close of the last trading day of the next month (i am using dividend adjusted prices obviously).
What assumptions are made for broker commissions? bps?
What assumptions are made for short lending/borrowing? bps?
What assumptions are made for cash interest?
I can’t seem to reconcile well the cash + open p/l data that comes from C2DS with the historical signals, upon backtesting this - it matches up over the long run in one way or another, but there are not insignificant fluctuations along the way. Help appreciated in understanding how all of this is being calculated and can be reconciled.
Hi, Steven:
Let me tackle your questions one at a time, in sequence.
>Can someone pls explain how the monthly numbers are calculated? Is it the mark-to-market of the underlying securities from the close of the last trading day of the month through close of the last trading day of the next month?
I assume you are speaking here specifically about the monthly returns numbers posted at the top of system pages for systems that are more than 1 month old. In general, you are correct, the monthly numbers are based on the last equity snapshot of the previous month, and the percentage difference between that snapshot and the most recent equity snapshot. However, other costs are also included. For example, your system subscription fee is included, which reduces returns. Also, “typical commission plus fees” is included, as per US regulations. This includes broker commissions plus any autotrade per-execution fees, if any.
Now, the preceding paragraph touches on two issues which probably could use some clarification. I refer to “equity snapshots,” so let me explain what this means.
Throughout the day, at periodic intervals, C2’s computers look at your system and mark it to market using current prices. This is the equity snapshot I refer to. These periodic snapshots are essentially what make up the raw data underlying your equity chart on your system page (however, when the chart is displayed on screen, it too is adjusted to include the costs described above: e.g. system subscription fees and commissions).
As for the frequency of these equity snapshots, that depends. In general, you can expect a snapshot at least once per day. But systems with more subscribers and autotraders, or systems that are viewed by a lot of people, are given extra CPU resources, and they might receive snapshots dozens of times each day.
Regardless of whether the frequency is daily or hourly, the intervals are effectively random and you shouldn’t expect that they occur on the hour, for example, or only after the market close each day. They may occur at noon, or at 3pm ET, or whatever.
Now, let me turn to the second issue I alluded to earlier, and which you specifically ask about: What are the brokerage costs C2 applies to returns?
We use the “Typical Broker Commissions” adjustment. You can see the specific cost assumptions by doing the following:
Near your system equity chart, find the little link which says: Change Commission Plan. This link allows you to play around with different commission assumptions. (Changing it only affects your view; other people will not be affected by your changes.
Choosing among “Commission Plans” will change both the equity chart and the monthly results and the per-trade P/L itemization towards the bottom of your screen.
When you click the link you will be shown a pop-up menu of the various brokers with whom we work. Beside each broker is a little question mark. Click the question mark and a secondary window will appear showing you the actual commission costs C2 uses for that broker. These costs are estimates only, but they generally capture the cost structure of each broker.
OK, with that background information provided, let me turn to your other specific questions.
> What assumptions are made for short lending/borrowing? bps? What assumptions are made for cash interest?
We do not simulate either of these things in your C2 Model Account.
> I can’t seem to reconcile well the cash + open p/l data that comes from C2DS with the historical signals, upon backtesting this - it matches up over the long run in one way or another, but there are not insignificant fluctuations along the way.
I may not fully understand your question, but let me take a crack at it. I think you are saying that you download your system’s equity series via the C2 Data Services API, and you are trying to compare a given equity data point with your system’s actual positions at that time.
Here it may be useful to recall the information I provided above about how those equity data points are constructed. They are generated at what are essentially random intervals throughout the day. (Actually, it’s a bit more complicated than that; we prioritize equity calculations when systems open or close positions, but this is just a relative prioritization; not a firm schedule).
Given that the snapshots occur many hours apart, it’s quite possible that they don’t capture the full nuances of your portfolios movement. But the beauty of marking to market is that in general these deltas are kept relatively minor, and they converge with reality as you expand your time frame. The more granular your data, the more representative they become. In other words, looking at your equity on a daily basis will be quite accurate; on an hourly basis less so; on a minute basis, forget it.
I hope this information is helpful.
MK
