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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?

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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.

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  • $\begingroup$ but for a MM looking at the markout PnL seems weird because the quote you sent at t = 0 might not be executed for t < 0 because there were more competitive quotes in the book. Also for a taker strategy I was thinking it more in: if you see that you loose a lot of PnL for T < 0 but then for t > 0 the pnl is upward slopping then it might mean the strategy is a mean reverting strategy. Was wondering if all these are correct reasoning $\endgroup$
    – option_vol
    Commented Mar 7 at 17:53

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