Implementation Shortfall - Delay (Slippage) Cost for Execution on Same Day

CFA Level III
#1

Read quite a few discussions on this but didn’t seem to find a definitive answer:

In implementation shortfall, is there delay / slippage cost if the trade is executed on the same day?

In other words, does delay cost only exist if the trade was delayed for a minimum of a day (assuming no other information was stated)?

The key is in when there is no other information stated - kaplan schweser mentions that the “benchmark price is the market price of the security if the order is not completed in a timely manner as defined by the user. A manager who requires rapid execution might define this as an hour. If not otherwise stated, it is assumed to be within the trading day.”

Ex. Buying stock:

BP = day 0 closing price ($8)

DP = day 1, 10am (decide to buy 100 @ $10)

EP = day 1, 11am (successfully execute 50 @ $11)

CP = day 1 end ($12, trades for remaining 50 cancelled)

No other information stated on if the benchmark price gets updated or not within the day.

Therefore, Option 1. Delay Cost = BP - BP ($0), Market Impact = EP - BP ($3), Missed Trade = CP - BP ($4) - IS is the weighed avg.

or is it, Option 2. Delay Cost = DP - BP ($2), Market Impact = EP - DP ($1), Missed Trade = CP - BP ($4) - IS is the weighted avg.

I’ve seen a CFAI mock answer do it the former way (option 2) - driving me crazy.

Thanks!

#2

probably the PM is making their decision using yesterdays price (no access to live prices). so when he sends the order to the execution desk already $2 is lost. the trader gets some of it executed $1 loss. another $4 lost on the cancelled order.

i question the ‘1 hour’ rule. in the real world this will likely be 3mins.

#3

Implementation Shortfall = (Paper gain - real gain )/ Paper Investment . Its components are Explicit cost = Commission / paper portfolio invt Realised Loss = (Shares Purchased / Shares ordered ) * (Execution Price - Prev days Close )/ benchmark Price Delay cost = (Shares Purchased / Shares ordered)* (Prev day close - benchmark Price )/ benchmark Price Missed Trade opp Cost = (Shares Not purchased / Shares ordered)* (cancellation Price - benchmark price)/benchmark price An exmaple will make it clear. On Monday, the shares of Impulse Robotics close at £10.00 per share.  On Tuesday, before trading begins, a portfolio manager decides to buy Impulse Robotics. An order goes to the trading desk to buy 1,000 shares of Impulse Robotics at £9.98 per share or better, good for one day. The benchmark price is Monday’s close at £10.00 per share. No part of the limit order is filled on Tuesday, and the order expires. The closing price on Tuesday rises to £10.05.  On Wednesday, the trading desk again tries to buy Impulse Robotics by entering a new limit order to buy 1,000 shares at £10.07 per share or better, good for one day. That day, 700 shares are bought at £10.07 per share. Commissions and fees for this trade are £14. Shares for Impulse Robotics close at £10.08 per share on Wednesday.  No further attempt to buy Impulse Robotics is made, and the remaining 300 shares of the 1,000 shares the portfolio manager initially specified are never bought. The paper portfolio traded 1,000 shares on Tuesday at £10.00 per share. The return on this portfolio when the order is canceled after the close on Wednesday is the value of the 1,000 shares, now worth £10,080, less the cost of £10,000, for a net gain of £80. The real portfolio contains 700 shares (now worth 700 × £10.08 = £7,056), and the cost of this portfolio is 700 × £10.07 = £7,049, plus £14 in commissions and fees, for a total cost of £7,063. Thus, the total net gain on this portfolio is – £7. The implementation shortfall is the return on the paper portfolio minus the return on the actual portfolio, or £80 – (– £7) = £87. More commonly, the shortfall is expressed as a fraction of the total cost of the paper portfolio trade, or £87/£10,000 = 87 basis points. We can break this implementation shortfall down further: Commissions and fees are calculated naturally as £14/£10,000 = 0.14%. Realized profit/loss reflects the difference between the execution price and the relevant decision price (here, the closing price of the previous day). The calculation is based on the amount of the order actually filled: (700/1,000)* (10.07 − 10.05) / 10.00 = 0.14% Delay costs reflect the price difference due to delay in filling the order. The calculation is based on the amount of the order actually filled: (700/1,000) * (10.05 − 10.00) / 10.00 = 0.35% Missed trade opportunity cost reflects the difference between the cancellation price and the original benchmark price. The calculation is based on the amount of the order that was not filled: (300/1,000) * (10.08 − 10.00) / 10.00 = 0.24% Implementation cost as a percent is 0.14% + 0.14% + 0.35% + 0.24% = 0.87%, or 87 bps.** Hope it helps**

#4

Thanks for the reply Pb73, the part in your example where the benchmark price updates to the closing price of day 1 (from $10 to $10.05 - therefore making the Delay Price $0.05*[700/1000]) makse sense to me - since the trade is delayed until the next day it is a delayed cost. My confustion lies in the case that the trade gets decided and then executed on the same day, do you have an answer to this? Thanks.

#5

No delay cost if the trade got executed on the same day. Only Price Impact.

#6

+1

Delay cost is measured using the closing price at day t vs closing price at day t-1.

Realised PnL (Price Impact) is measured using the closing price at day t-1 Vs the excution price the following day.

#7

Cool, seems like i managed to beat the CFA marking rubric gods in one of their mocks then :wink: (2014 AM, Q10-D - they implicitly calculated delay cost for within a day period)

#8

It asked for realized P/L, not delay cost…

#9

according the marking rubric, if you included intraday delayed costs in P/L computation, your answer would be wrong - therefore, it is implied that delayed cost is separately accounted for (i was reading between the lines to see what CFAI expects).

#10

I’m not sure what you’re talking about as I haven’t gone through the 2014 AM yet.

I might get back to you when I do solve it tomorrow.

#11

From what I have read, delay cost = DP-BP=10-8=4 in this case.

Delay cost depends on if DP=BP, shouldn’t matter if it’s in the same day or no.

#12

Do you remember where you read that from CFA2015? Schweser or CFAI?

#13

Below is from CFAI:

Delay costs (slippage), reflecting the change in price (close-to-close price movement) over the day an order is placed when the order is not executed that day; the calculation is based on the amount of the order actually filled subsequently.

–I have to say this is vague, and only includes the situation that the orders don’t fill within one day.

Below is my notes from Wiley:

Slippage (delay costs): price movement of the decison price away from the hypothetical/desired price if an order is not executed the same day.

-I think this is where my impression is from, and it applies to this situation.

  • The LevelUp class I took used this formula as well: Delay cost = DP -BP
#14

Delay cost is the (new benchmark price - decision price) / decision price * shares executed at new BP/total shares

Or

(New benchmark price - decision price) * number of shares at new BP / paper portfolio value

#15

In the example in los31.f (schweser book - ‘megabite’ example) the market impact is part of the IS, as you would expect. In the self test at the end of the study session (‘Tabler Industries Pension Fund’ nancy wienke example) part 3, the implementation shortfall doesn’t include the Impact element. Can someone please help??!?

thanks in advance!