Implementation Shortfall

Implementation Shortfall (IS) indicates the difference between the price at which trader wants to execute order versus the average traded price that is actually achieved. The reference price provided by trader is used as a benchmark. In case the reference price is not provided, the broker uses the market price at the time which order arrives as the benchmark price.

When & Why to chose IS?

  1. When you want to limit the market impact of your trade and at the same time take advantage of favorable price movements
  2. The strategy calculates optimal time horizon to execute the trade using stock’s historical volume profile, liquidity and volatility. Example:  the strategy will try to completely execute the order in short time span when A) the stock has high volatility, B) low bid-ask spread C) low momentum
  3. After calculating optimal trading time, the strategy may decrease participation rate when prices move against the benchmark price and increase participation rate when price move in favor of benchmark price
  4. IS when used with a price band does not guarantee complete execution of order

Strategy Parameters:

(Given below are some general parameters to help you decide what is essential for you; the actual strategy parameters will depend upon your broker)

Start Time: Any orders are not sent to market even if the decision logic generates buy/sell signal before Start Time.

End Time: All open orders are cancelled and no fresh signals accepted after End Time

%Volume: The strategy automatically adjusts the participation rate to limit it to the percentage of stocks total traded volume. Example, if the stock trades 100,000 shares in one minute and %Volume is 10, the strategy will trade 10,000 shares in the same minute.

Price Brand: The desired price band for the average traded price. If market moves beyond the price band limit, the order will not be completely executed

Reference Price: A given price which the strategy will try to better in execution