Implementation Shortfall (Arrival Price)

Implementation Shortfall (AP) orders refer to liquidity-demanding orders where performance is measured off the midpoint of the current bid/ask prices.


The two components of the economics of the Implementation Shortfall strategy, namely market impact and volatility can be summed up as follows


Profit and Loss = Market Impact + Cost of Volatility,


Both components are contingent on the trading strategy curve. Each of the components could be minimized separately at the cost of leaving the other one uncontrolled, and arbitrarily large. Indeed, minimization of market impact leads to a VWAP-type of strategy with large volatility. Minimal volatility is achieved using instant execution upon order arrival, with high expected market impact. Both extremes are unsatisfactory, and a reasonable strategy should have a balanced contribution of two terms above. This balance brings in some contribution from each of them, and determines the optimal end time.


The AP tool minimizes a user-defined combination of market impact and volatility to meet client-specific risk aversion. Although any rational risk aversion can be accommodated, the typical requested functionality is reduced to a few urgency levels. In addition to risk aversion, the available parameters include precise timing of order start and end points. The strategy can also be executed in an unconstrained mode where the computer-generated optimal end time is not restricted by the user, and the code may run, if needed, for a few consecutive days.


AP strategy is one of the strategies in the arsenal of the Quant Isle Ltd. This strategy is suitable for those clients who transact within the universe of Russell 3000 index.