# Implementation shortfall - Decision Price vs Benchmark Price

I’ve done many problems on this already, but it just doesn’t seem to sink in. If I’m correct: Benchmark price = price of the close of the day before you plan on buying? Decision price = price of the closing day afterwards? Anyone care to clarify? J.

benchmark is yes but never heard about decision price. Do you mean delay?

Well the way I remember it: Implementations Shortfall = Explicit costs + Realized profit&loss + Delay costs + Missed trade opportunity cost Where: Delay costs = ((Decision price - Benchmark price) / Benchmark price ) * % filled

decision price = close price the day before the order was executed benchmark price = close price the day before you want to do something. difficult to explain, but example is best. Say its Wednesday, stock closes at X. On Thursday you want to put in an order, but it doesn’t get filled until Friday. X is your benchmark price. Thursday’s closing price is the decision price, since you were partially filled on Friday, so previous close of executed day is Thursday.

A good example in the CFA text SS 16-18 p. 58 Problem #11. Have you worked thru that problem?

I use that methodology to with the Decision Price and (DP-BP)/BP You may be looking to deep into it. The Decision price is when they decide to act it and buy the security. In most examples it’s just 1 time but there can be more than 1 decision price. Ex. Manager has a buy order in at \$9.95. Benchmark Price, Monday opening bell is \$10 never hits the \$9.95 Immediately the stock jumps to \$10.20 and manager goes for 500 shares at \$10.20 with a market order. The order fills at 10.28 Benchmark is 10 Decision is 10.20 Execution is 10.28 Only thing that you are missing is the closing price in which management decides to compare for missed opportunity cost.

Yeah I think I was overanalyzing it a bit. Thanks for you input to both! J.

So, let’s say you partially filled the limit order at, say, \$10.50, while the closing price the day before was \$10 (and the benchmark is \$10 since the decision was made yesterday). Does this mean that there is no delay cost here? I did delay it one day, didn’t I? or is it simply that the rest of the market has not seen my order yet, hence no information has been leaked… hence, no delay costs… I think, as I am writing this out, it starts making sense! haha!

^^ Benchmark price is NOT the price (in your case) of y’day closing. Since you decided to buy yesterday, BM is the closing price a day BEFORE yesterday.

I thought BM could be any price… you can even declare your own BM price (say midpoint of the day you are deciding to implement your order). It’s simply a reference point… but I am not sure… Any thoughts?

I thought BM could be any price… you can even declare your own BM price (say midpoint of the day you are deciding to implement your order). It’s simply a reference point… as long as it has been noted and decided upon before any orders are placed… and it never changes until the end of the execution phase… but I am not sure… Any thoughts?