You decide to buy 300,000 shares at a decision price of $50.00. You fill 200,000 at an average of $50.20 and cancel the rest. The stock closes at $50.60. What is the implementation shortfall in basis points of the intended order?

You decide to buy 300,000 shares at a decision price of $50.00. You fill 200,000 at an average of $50.20 and cancel the rest. The stock closes at $50.60. What is the implementation shortfall in basis points of the intended order?

Approach: Price the paper portfolio at the decision price, then charge both the executed slippage and the unfilled remainder against it.

66.7. The implementation shortfall is 66.7 basis points. Implementation shortfall compares the paper portfolio struck at the decision price with what the desk achieved. The executed part costs 200,000*(50.20 - 50.00) = $40,000, and the 100,000 shares never bought cost 100,000*(50.60 - 50.00) = $60,000 of opportunity cost, so the total is $100,000 on an intended notional of 300,000*50 = $15m, which is 66.7 basis points. The unfilled part is the larger half, which is the reason for measuring it at all: a passive schedule that captures only two thirds of the order looks cheap on the fills it got and is expensive on the decision the portfolio manager made. Splitting the number into delay, market impact and opportunity cost tells the desk whether the fix is to trade faster or to size smaller.

Follow-up: How would the number change if the stock had closed at $49.50 rather than $50.60?

Key concepts: implementation shortfall, opportunity cost, decision price, market impact.