Implementation Shortfall

What is the difference betwen the benchmark price, decision price, and first day’s close? When do you use each respectively?

Decision price is the price of the stock when you first decide to implement the trade (usually the opening price). Benchmark price is the stock price when you revise your original order (usually the closing price).

So for Realized P&L - the Relevant decision price is either:

Original Benchmark Price stated on Day 1

or Prior Day’s closing Price for Day 2’s onwards

When doing IS, also keep in mind for Day 1, Book 6, page 25, footnote 19 it also said “The midquote at the time the decision is made is another possible benchmark price.”

So the Decicion Price (DP) and the Benchmark Price (BP) can be the same if the decision to buy was made on the same day.

i can calculate the IS quite easily… but does anyone have a good way to remember the forumlae of the individual components of the IS?

I think using below directly will be easier. No idea about benchmark price, decision price…

  • Explicit costs: commissions, fees and taxes. - Realized profit/loss: reflects the difference between the execution price and the relevant decision price (usually taken to be the previous day’s close). The calculation is based on the amount of order actually filled. - Delay costs (slippage): reflects the change in price (close-to-close price movement) over the day an order is placed if the order is not executed that day. The calculation is based on the amount of the order actually filled. - Missed trade opportunity cost (unrealized profit/loss): reflects the price difference between the trade cancellation price and the original benchmark price based on the amount of the order that was not filled.


But I do find Delay costs and Realized profit is a bit confusion. I prefer to combine them as one item!