Realized vs. Mark-to-Market P&L
Realized P&L is money from completed round trips. You bought and you sold, and the difference is locked in.
Mark-to-market P&L is the paper value of what you still hold, valued at current prices.
Total P&L is the sum, and the two behave completely differently.
You buy 1,000 at 100.00 and sell 600 at 100.05. Price is now 99.90.
Realized: $30, from . Locked in, unaffected by anything that happens next.
Open position: long 400 at an average entry of 100.00.
MTM: -$40, from .
Total: -$10. You made money on every trade you completed and are down on the session, because the position you are still carrying moved against you.
Realized P&L is history and cannot change. MTM is live risk and changes every tick. A market maker with good realized P&L and a large adverse MTM has a risk problem, not a performance success.
Why MTM is the number that matters intraday
Realized P&L tells you what you have already achieved. MTM tells you what is currently at stake, and it is the number risk limits are enforced against, because it is the only one that responds to danger in real time.
MTM also moves without any trading at all. Hold a position through a quiet hour and your P&L still swings with the market. That is the entire point: it measures exposure, not activity.
Marking honestly
MTM depends on the price you mark at, and that choice is not innocent.
Mark a long position at the bid and you are recording what you would actually get if you sold now, which is conservative and realistic. Mark at the mid and you record a slightly better number, ignoring the spread you would pay to exit. Mark at the ask and you are flattering yourself substantially.
Firms specify the convention precisely, usually mid or a conservative variant, because inconsistent marking is how losses get hidden. For illiquid instruments with no reliable market price, marking becomes a genuine judgement and a genuine governance risk.
The psychological trap
The distinction creates a well-known behavioural failure: traders treat unrealized losses as somehow less real than realized ones, and hold losing positions to avoid "making it real" by closing.
The market does not care about your entry price. A position is either one you would open today at today's price, or it is not. The average entry is a historical accident with no bearing on whether holding is currently a good decision.
Ask of every open position: would I put this trade on right now at this price? If not, the only reason you are holding it is the entry price, which is not a reason.
This is why firms enforce inventory limits automatically rather than leaving them to judgement. The bias is predictable enough that the system should not depend on individuals overcoming it under pressure.