Position and Cash Reconciliation Breaks

A trading system keeps its own internal record of what it owns and how much cash it has, built up trade by trade as orders fill. The broker or custodian keeps an entirely separate record, built from their own processing of the same trades. In theory these two records always agree. In practice they periodically diverge — a fill gets double-counted internally, a corporate action gets applied on one side and missed on the other, a trade booked late shows up in one system's end-of-day snapshot but not the other's. A reconciliation break is any point where the internal record and the external record disagree, and finding and explaining every single break, every day, is one of the least glamorous but most important disciplines in running a live strategy.

The reason this matters more than it might seem is that an unreconciled break is, by definition, a place where nobody actually knows the true state of the portfolio. If the internal system thinks it holds 10,000 shares of a stock and the prime broker's record shows 9,500, then risk calculations, P&L, and margin usage computed from the internal number are all quietly wrong until the break is explained — and an explainable break (a trade settling a day late, say) is very different from an unexplainable one, which might mean a trade was never actually sent to market despite the internal system believing it was filled.

A concrete example: an overnight reconciliation report flags a cash break of $120,000 — the internal ledger shows $120,000 more cash than the custodian's statement. Investigation traces it to a dividend that was accrued internally on the ex-dividend date but not yet actually paid by the custodian, which is a timing difference that will resolve itself in two business days and needs no action beyond noting it. A different $120,000 break, on closer inspection, might instead trace to a trade that was sent twice by mistake — a genuine error that needs to be unwound before it distorts the next day's risk numbers.