Think about this scenario:
- On January 31 the portfolio holds 20 different stocks, along with some cash.
- On February 15, a purchase is made for 500 shares of Dell (which remains, at least at the moment, a public company).
- On February 16 a large cash flow occurs and the portfolio is revalued. Since it's a trade date system, the Dell position is included.
- On February 18, the trade is cancelled, because it's determined that it was done for the wrong client. And so, the position is reversed.
- On February 28, the portfolio is revalued with closing prices.
- On March 5, the portfolio is reconciled with the custodian's month-end positions and found to tie out 100%.
When we get involved with designing performance systems for clients, the reliability of the daily valuations is often an issue we address. In most cases I am not a fan of storing daily valuations, but rather to back into them, when necessary. If you're using a method that revalues for large flows, you should ensure that this is more than just repricing; otherwise, some errors may be creeping in (here, you do all this additional work for a more accurate result, only to have an avoidable error appear). At a minimum it's worth asking, what happens when a cancel/correct occurs?