Implementation shortfall - 2 partial transactions

CFA Level III
#1

A trader wants to purchase 1000 shares.

  • On Monday, the shared closed at $ 59.90 /share
  • On Tuesday, 500 shares were purchased at a price of $ 61.05 per share. Commissions and fees were 50. The shares closed at 62.07 per share.
  • On Wednesday, no shares were purchased. The shares closed at $ 63.00 per share.
  • On Thursday, 200 more shares were purchased at $ 62.05 per share. Commissions and fees were $20. Shares closed at $61.03 during the same day.
  • On Friday, no more shares were purchased and the order was canceled. The market closed at $ 62.00 per share.

Could you determine

  • Decision price
  • Benchmark price ( price s )
  • Execution price
  • Cancelation price

and after that, calculate the 4 cost components of the total IS?

#2

Decision price = 59.9

Benchmark price

  • Tuesday = 59.9
  • Wednesday = 62.07
  • Thursday = 63
  • Friday = 61.03

Execution price

  • ​​​​​​​Tuesday = 61.05
  • Thursday = 62.05

Cancelation price = 62

Basically, yestarday’s closing price becomes the new benchmark price.

#3

Thank you. I see more clearly the total IS.

#4

Just for my own practice, correct me if I’m wrong:

Cancelled trades: 300 x (62.00 - 59.90) = 630

Delayed trades: 200 x (63.00 - 59.90) = 620

Market impact: 500 x (61.05 - 59.90) + 200 x (62.05 - 63.00) = 385

Trading costs: 50 + 20 = 70

Total IS: 630 + 620 + 385 + 70 = 1705

Verifying total IS via hypothetical portfolio method:

Paper portfolio gain: 1000 x (62.00 - 59.90) = 2100

Actual portfolio gain: (700 x 62.00) - (500 x 61.05 + 200 x 62.05) - (50 + 20) = 395

Total IS = 2100 - 395 = 1705

1 Like
#5

@Moonborne, I think your result is correct.

#6

so is there only 1 DP of all time, and the BP is constantly changing with daily closes?

i thought it was actually the DP thats constantly changing with daily closes?

#7

also @moonborne confused by this:

Market impact: 500 x (61.05 - 59.90) + 200 x (62.05 - 63.00) = 385

im confused: wouldnt the DP (59.90) be there instead of the 63.00 in the second term of the equation?

#8

@Tommyjohn, no, he is correct. In fact, Market impact = nbuy * (ExecutionPrice - BenchmarkPrice) so you must use Benchmark price, not DP.

#9

got it. the BP price is prev day close. thanks!

#10

Moonborne- why do you not divide the components by shares and BP? Is this because you are looking for a cash amount? If you were looking for a bps amount you would divide for example cancelled trades by 1000 and 59.9?

Can I also check that the below formulas are correct?

slippage: DP-BP/ BP x shares traded/ total shares

executed P&L: EP-DP/BP x shares traded/ total shares

missed opp cost CP-BP/BP x shares not traded / total shares

commission: commission/ total sharesxDP?

Thanks!

#11

It’d be divided by the original paper portfolio value (I.e. 1,000 shares * 59.9 = 59,900).

#12

@GAAPIFRS

Slippage should be reversed, i.e. BP - DP. A positive number wil mean a loss due to slippage (price has increased which you did not capture).

Price impact is either EP - DP or EP - BP in case there is slippage. If there is only 1 trade (whether fully executed or not), then it is just EP - DP and no slippage.

Missed opp. should be CP - DP in any case.

Then divide everything by total shares times initial DP if you want to express it in basis points.

#13

God, I hate Implementation shortfall.

I hope we don’t get a question on it. If it’s on PM, I’ll just guess and move on :grin:

#14

so far, practices regarding implementation shortfall (online) is simple and clear-cut with only 1 trade/transaction. having multiple transactions over multiple days really amplify the headache.

sticking with the hypothetical portfolio method makes everything so much simpler

#15

thank you moonborne!!

#16

Agree the hypothetical is really easy if total IS is asked. And most times the exam asks either total IS or one specific part.

@GAAPIFRS No problem!