Forums  > General  > Sensible? Markit: "The Use & Abuse of Implementation Shortfall"  
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Total Posts: 30
Joined: Jun 2010
Posted: 2017-04-19 09:23
I find myself looking at a Markit white paper, Use and Abuse of Implementation Shortfall. I'm finding it difficult to make sense of a lot of this paper's content, e.g.:

1) On page 9, I read:
"Following this thought process of attributing decision price slippage; the implementation shortfall of executed orders can be separated into two components. The first part is the market impact, or ‘footprint’, that results from the series of individual trades required to complete an order. This part captures both the spread and market impact components of implicit cost. The second part is the effect of the competing trades that are responsible for the price drift over the execution period and captures the remaining market timing or momentum aspect of implicit costs."

My best guess: does this suggest that the mid-price moves directly resulting from our orders clearing out a level form part of "market impact", but that price changes that do not result directly from our trades should not be considered "market impact" but rather split out into some separate "market timing" component?

This doesn't make too much sense, since by this logic orders that only clear out 90% of the available volume at the BB/O would have "market impact" only equal to spread costs, despite the fact that the market will be more likely to roll away from you, or less likely to roll towards you, as a result, and that fundamentally you've consumed liquidity.

2) The paper repeatedly refers to how execution traders can accelerate or decelerate trade rates in response to favourable or adverse "momentum". The most sensible interpretation I can come up with here is that they simply mean adverse or favourable price movements relative to the arrival price, rather than "momentum" in any sense that I'd use the word. Am I missing something?

[Edit: typo]

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Total Posts: 5048
Joined: Mar 2004
Posted: 2017-04-19 12:27
Markit is a bit of a head scratcher. Not too long ago I needed to understand something they were doing methodologically. The "white paper" I was provided looked like some kid randomly sampled phrases from Hull. I didn't read the paper you attached but a quick scan reminds me of this incident.

I've used Markit for data and essentially the old Totem business they acquired way back. Many of the technical discussions I've had with them over the years makes me wonder who is running things over there.

Nonius is Satoshi Nakamoto. 物の哀れ


Total Posts: 289
Joined: May 2006
Posted: 2017-04-19 15:30

Mid price is not generally a useful piece of information.

The question most people ask is "how many shares do I need to do, and what is the likely average price I will do them at". This leads to concepts like "microprice" etc - you weigh prices by number of shares available at different levels, and potentially other factors as well.

If you lift liquidity out of the book, you move this number. Somebody else may have wanted those shares. On the other hand people on the other side see you potentially running them over - they don't know what your total size is.

The second part refers to how those people may react. People who see liquidity being taken in front of them may want to hurry up before it gets worse. People who see you coming their way may pull back so you don't run them over.

So you have immediate impact on your book-weighted-price, and then you have the reaction of other traders to your impact on the book-weighted-price.

Without having read the paper, I assume that by "momentum" they mean a measure of number of shares traded ("mass") and the speed at which the price moves ("velocity").

"People say nothing's impossible, but I do nothing every day" --Winnie The Pooh


Total Posts: 303
Joined: Jan 2015
Posted: 2017-04-20 00:05
Re: "Adverse momentum"

The simplest case here would be a trade based off some alpha signal with roughly the same horizon as the execution schedule. E.g. some stat-arb portfolio trading on intraday alphas is going to be a lot more aggressive than an index fund rebalancing. Even before touching a single share the former expects the price to be moving against the implementation cost.

But probably the more common case would be a large portfolio who's already dumped a lot of order flow into the market. By the end of a large meta-order they've already revealed a lot of information about their size and intentions. That's introduced an adverse drift into the price, mainly because now they're competing against their previous counter-parties, who are trying to offload inventory.

Good questions outrank easy answers. -Paul Samuelson
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