Marking At Mid Versus Where You Can Get Out

A position's daily P&L needs a price to mark it at, and the easiest default is the mid — the average of the current bid and ask. That's a reasonable convention while a position is just sitting there, but it quietly overstates what the position is actually worth if you had to close it out right now, because actually selling means hitting the bid, not the mid, and actually buying back a short means lifting the ask, not the mid. The gap between mid and the real exit price is exactly half the bid-ask spread, and for anything illiquid that gap isn't a rounding error.

This distinction matters most in two situations. First, when a position needs to be liquidated under stress, the mark-to-mid P&L can be a materially rosier number than what actually gets realized, because a forced seller crosses the spread (and often moves the price further with size) rather than trading at the point exactly between bid and ask. Second, for less liquid instruments — small-cap stocks, off-the-run bonds, some options — the bid-ask spread itself can be wide and unstable, so a mark-to-mid valuation can swing on a stale or thin quote that has nothing to do with a price anyone could actually transact at.

The practical fix isn't to abandon mid-marking entirely, but to track both numbers: mid for daily continuity and comparability, and a conservative exit-price estimate (mid minus half-spread, or an even wider haircut for illiquid names) for actual risk decisions like how much capital a position is really worth if it needs to come off quickly.