Can someone explain the difference between these two? Thanks.
Orignial intended order that is never fulfilled (no of shares not purchased) vs opportunity cost in waiting from original decision time. For example. I want to purchase 1000 shares of X today. I get 500 shares purchases immediatley I purchase 200 shares tomorrow The remaining outstanding order of 300 is cancelled Missed is the 300 Delay is what I lost from the 1 day wait on the 200 shares.
If I remember, missed trade opportunity is the portion of the order that was not filled and is the final value of the stock divided by the base (beginning) value and multipled by the percentage of the order that was not filled. Delay costs is the cost associated with not filling a limit order, and *i think* is the value of the stock when the order is filled divided by the value of the stock the time the decision was made to invest in the stock weighted by the portion of the order filled. Not sure about the calc part but that is the essence.
PhillyBanker Wrote: ------------------------------------------------------- > If I remember, missed trade opportunity is the > portion of the order that was not filled and is > the final value of the stock divided by the base > (beginning) value and multipled by the percentage > of the order that was not filled. > > Delay costs is the cost associated with not > filling a limit order, and *i think* is the value > of the stock when the order is filled divided by > the value of the stock the time the decision was > made to invest in the stock weighted by the > portion of the order filled. Not sure about the > calc part but that is the essence. No, as mvvt9 example above, missed trade is those that are cancelled i.e 300 shares (and not unfilled orders). delay is those that are unfilled on the previous day but filled on the next day ie 200 shares. Formula will be (using same example): Delay cost = (Closing price on the day the 200 orders is filled - Closing price on the previous days)/ Benchmark price x 200/1000 MTOC = Closing price on the day the 300 orders was cancelled - Benchmark price)/ Benchmark price x 300/1000 So what is the benchmark price? I think it should be X.
Doing the schweser ex. On Wednesday the stock price of a company closes at $20 a share. On Thursday before market open, a PM decides to buy the company and submits a limit order for 1,000 shares at $19.95. The price never falls to $19.95, so the order is unfilled. The stock closes at $20.5 On Friday, the order is revised to a limit of $20.06. The order is partially filled that day as 800 shares are bought at $20.06. The commission is $18. The stock closes at $20.09 and the order for the remaining shares is $200. The overall implementation shortfall is the difference between what should have happened and what did happen: gain on paper portfolio – gain on real portfolio. The gain on the paper portfolio assumes the implementation occurs at the benchmark price – which in this case is the price at the end of Wednesday ($20) What should have happened = 1000 shares at $20 = $20,000 Value at end of Friday = 1000 shares at $20.09 = $20,090 Gain on paper portfolio = $90 What did happen = 800 shares at $20.06 = $16,048 Value at end of Friday = 800 shares at $20.09 – commission = $16,054 Gain on real portfolio = $6 Difference in ideal vs. actual = $84 Explicit costs = $18.00 Delay costs = ($20.05 – 20)*800 = $40 Realized Profit/Loss = (20.06 – 20.05)*800 = $8.00 Missed trade opportunity costs = 200*(20.09 – 20.00) = $18 As you can see, delay costs represent the cost of the missed day. The trade was supposed to be executed on Thursday, but it was not. The movement in price from the end of Wednesday to Thursday was $0.05, and that multiplied the number of shares that were eventually executed represent the cost of that missed day. Realized profit/loss is the difference between the actual execution price, and the closing price of the day before, multiplied by the eventual number of shares executed The key here is to isolate the expenses – you have to assume that you were executing 800 shares all along when calculating these two implicit costs – this way you can isolate the delay costs and realized p/l from the actual cost of the missed trade opportunity. The missed trade opportunity captures the cost of not being able to execute those remaining 200 shares at the benchmark. The key thing to remember is that the missed trade opportunity cost is not calculated as the difference between the close and the actual price which the other shares were executed, instead it assumes that the missed trade opportunity dates back to the benchmark price, at the end of Wednesday. Implementation Shortfall = paper portfolio gain – real portfolio gain / paper portfolio investment = 90 – 6 / 20,000 = 0.42% Explicit costs = 18 / 20,000 = 0.09% Delay costs = 40 / 20,000 = 0.20% Realized profit/loss = 8 / 20,000 = 0.04% Missed trade opportunity costs = 18 / 20.000 = 0.09% In order to determine the contribution of each component to the overall implementation shortfall, divide the dollar amount of loss by the original paper portfolio investment = # of ideal shares executed * benchmark price
1 Like
Super explanation … thanks Jscott24
Jscott has a gift. He should be an educator some day.
Jscott24 Wrote: ------------------------------------------------------- > Doing the schweser ex. > > On Wednesday the stock price of a company closes > at $20 a share. > On Thursday before market open, a PM decides to > buy the company and submits a limit order for > 1,000 shares at $19.95. The price never falls to > $19.95, so the order is unfilled. The stock closes > at $20.5 > On Friday, the order is revised to a limit of > $20.06. The order is partially filled that day as > 800 shares are bought at $20.06. The commission is > $18. The stock closes at $20.09 and the order for > the remaining shares is $200. > > The overall implementation shortfall is the > difference between what should have happened and > what did happen: gain on paper portfolio – gain on > real portfolio. The gain on the paper portfolio > assumes the implementation occurs at the benchmark > price – which in this case is the price at the end > of Wednesday ($20) > > What should have happened = 1000 shares at $20 = > $20,000 > Value at end of Friday = 1000 shares at $20.09 = > $20,090 > Gain on paper portfolio = $90 > > What did happen = 800 shares at $20.06 = $16,048 > Value at end of Friday = 800 shares at $20.09 – > commission = $16,054 > Gain on real portfolio = $6 > > Difference in ideal vs. actual = $84 > > Explicit costs = $18.00 > Delay costs = ($20.05 – 20)*800 = $40 > Realized Profit/Loss = (20.06 – 20.05)*800 = > $8.00 > Missed trade opportunity costs = 200*(20.09 – > 20.00) = $18 > > As you can see, delay costs represent the cost of > the missed day. The trade was supposed to be > executed on Thursday, but it was not. The movement > in price from the end of Wednesday to Thursday was > $0.05, and that multiplied the number of shares > that were eventually executed represent the cost > of that missed day. > > Realized profit/loss is the difference between the > actual execution price, and the closing price of > the day before, multiplied by the eventual number > of shares executed > > The key here is to isolate the expenses – you have > to assume that you were executing 800 shares all > along when calculating these two implicit costs – > this way you can isolate the delay costs and > realized p/l from the actual cost of the missed > trade opportunity. > > The missed trade opportunity captures the cost of > not being able to execute those remaining 200 > shares at the benchmark. The key thing to remember > is that the missed trade opportunity cost is not > calculated as the difference between the close and > the actual price which the other shares were > executed, instead it assumes that the missed trade > opportunity dates back to the benchmark price, at > the end of Wednesday. > > Implementation Shortfall = paper portfolio gain – > real portfolio gain / paper portfolio investment > = 90 – 6 / 20,000 = 0.42% > > Explicit costs = 18 / 20,000 = 0.09% > Delay costs = 40 / 20,000 = 0.20% > Realized profit/loss = 8 / 20,000 = 0.04% > Missed trade opportunity costs = 18 / 20.000 = > 0.09% > > In order to determine the contribution of each > component to the overall implementation shortfall, > divide the dollar amount of loss by the original > paper portfolio investment = # of ideal shares > executed * benchmark price Good example from Schweser. Just a typo - the closing stock price on Thursday should be $20.05 and not $20.50. I have a question, so what is defined as the benchmark price? There is an example question in 2006 that defined it as the current market price when the trader receive a buy order from a client and given the discretion with regard to the timing and number of shares to be purchased.
In most of the problems I have worked, the benchmark price is the closing price the day before the order is executed. So the vignette says something like: xyz closed tuesday at $10. On wednesday morning, Joe Smith decides to enter a limit order for $9.95. That day he gets half of his order filled, and xyz closes at $10.25. He then decides to raise his limit price to $10.15 to try and finish out his order. The new benchmark price is Wednesday’s close, $10.25. This new benchmark is needed to calculate the Profit/Loss and Delay/Slippage components of total trading costs under the implementation shortfall method.
^^ really?? I thought the benchmark price would remain as Tuesday’s closing price…because Wednesday was the first time the order was placed…I don’t think you take wednesday’s closing price because he revisits his limit price…haven’t seen any examples doing that… or maybe I just missed that…
mumukada Wrote: ------------------------------------------------------- > ^^ really?? I thought the benchmark price would > remain as Tuesday’s closing price…because > Wednesday was the first time the order was > placed…I don’t think you take wednesday’s > closing price because he revisits his limit > price…haven’t seen any examples doing that… > > or maybe I just missed that… Terminology is bit confusing but the logic is same as explained by JScott24. In ilvino’s eg it is mentioned that the new Benchmark price is Wednesay’s close price. Now this price should only be be used for calculating delay costs and realized gain or loss on delayed order. There is a simlar situation in EOC Q Q11 reading 45. Assuming order size 1000 and rest of order filled on Thursday at 10.28. Ist order(500) no delay costs as it was executed on the same day. Therefore, only realized gain or loss (9.99-10)500= -5 gain 2nd order. Execution was delayed therefore both delay costs and realized gain or loss. Delay costs (10.25-10)500 = 25 Realized gain or loss (10.28-10.25)500 =15 Total shortfall 35…(-5+25+15) No opportunity costs assuming entire order was executed. Hope this helps.
aah…yes that makes sense…that was my understanding…just the terminology he used caught me off guard I guess…that’s fine … thanks.
Can some expert tell me where i went wrong??? Textbook answer only shows working on real portfolio gain vs paper portfolio gain and then the implementation shortfall. When I try to decompose it into delay cost, explicit cost, MTOC and realised profit, I cant get 1.39%. Question: Mike is interested in capturing all the elements of transaction costs in his analysis, and therefore asks Donna to examine the aspect of implementation shortfall for the following purchase: Late on Monday of last week, to adjust Acme’s tactical asset allocation, Mike decides to buy 10,000 shares of XYZ Co. When Mike makes the decision to purchase XYZ Co, the stock is trading at $19.90, and closes a short while later at $20.00. The next day an order goes to the trading desk to buy 10,000 shares of XYZ Co at $19.98 or better, good for the day. No part of the limit order is filled on Tuesday, and the order expires. XYZ Co closes at $20.10 that day. On Wednesday, the trading desk again tries to buy XYZ Co entering a new limit order to buy 10,000 shares at $20.13. That day 9,000 shares are bought at the limit price. Commission and fees for this trade are $0.05 per share. XYZ Co closes at $20.16 on Wednesday, and no further attempt to buy the remainder of the initial order is made. Calculate the implementation shortfall on the above referenced trade, expressed as a fraction of the total cost of the paper portfolio trade. Answer is: 139.7 basis point. Paper portfolio gain: 10,000 x ($20.16 - $19.90) = $2,600 Real portfolio loss: 9,000 x ($20.16 – $20.13 – $0.05) = -$180 Implementation shortfall = (2,600 + 180) / 10,000 x $19.90 = 1.397% My answer - decomposing into: Explicit cost = ($0.05 x 9,000) / (10,000 x $19.90) = 0.226% Delay/ Slippage cost = ($20.10 - $20.00)/$19.90 x 9,000/10,000 = 0.452% Realised profit = ($20.13 - $20.10)/ $19.90 x 9,000/10,000 = 0.135% Missed trade opportunity cost = ($20.16 - $19.90)/$19.90 x 1,000/10,000 = 0.131% Total Implementation cost = (0.226% + 0.452% + 0.135% + 0.131% = 0.944%
Delay/ Slippage cost (20.10-19.90)9000= 1800 1800/paper portfoilio value(10,000*19.9) =.9045%
Got it…thanks Rakesh. Delay cost should make reference back to benchmark price.
pmoonoi Wrote: ------------------------------------------------------- > > Late on Monday of last week, to adjust Acme’s > tactical asset allocation, Mike decides to buy > 10,000 shares of XYZ Co. When Mike makes the > decision to purchase XYZ Co, the stock is trading > at $19.90, and closes a short while later at > $20.00. The next day an order goes to the trading > desk to buy 10,000 shares of XYZ Co at $19.98 or > better, good for the day. No part of the limit > order is filled on Tuesday, and the order expires. > XYZ Co closes at $20.10 that day. On Wednesday, > the trading desk again tries to buy XYZ Co > entering a new limit order to buy 10,000 shares at > $20.13. That day 9,000 shares are bought at the > limit price. Commission and fees for this trade > are $0.05 per share. XYZ Co closes at $20.16 on > Wednesday, and no further attempt to buy the > remainder of the initial order is made. > > Calculate the implementation shortfall on the > above referenced trade, expressed as a fraction of > the total cost of the paper portfolio trade. > > Answer is: 139.7 basis point. > > Paper portfolio gain: 10,000 x ($20.16 - $19.90) = > $2,600 > Real portfolio loss: 9,000 x ($20.16 – $20.13 – > $0.05) = -$180 > Implementation shortfall = > (2,600 + 180) / 10,000 x $19.90 = 1.397% > > My answer - decomposing into: > > Explicit cost = ($0.05 x 9,000) / (10,000 x > $19.90) = 0.226% > Delay/ Slippage cost = > ($20.10 - $20.00)/$19.90 x 9,000/10,000 = 0.452% > Realised profit = > ($20.13 - $20.10)/ $19.90 x 9,000/10,000 = 0.135% > Missed trade opportunity cost = > ($20.16 - $19.90)/$19.90 x 1,000/10,000 = 0.131% > > Total Implementation cost = > (0.226% + 0.452% + 0.135% + 0.131% = 0.944% Umm, I have a different benchmark price(BP) to solve this, which also leads to exactly 139.7 bps. I use a constant BP of $19.90 Explicit cost = ($0.05 x 9,000) = $450 Delay/ Slippage cost = ($20.13 - $19.90) x 9,000 = $2070 Realised profit = ($20.13 - 20.13) x 9,000 = 0 ( since EP = Avg purchase price) Missed trade opportunity cost = ($20.16 - $19.90) x 1,000 = $260 Total Implementation cost = ($450+$2070+$0+$260)/$19.9*10,000 = $2830/$199000 = 137.9 Bps. Any comments???