Implementation shortfall

Implementation Shortfall is the difference between the price of the stock when the decision to trade was initially made, and the final execution price (including commissions, taxes, etc.). This is also known as the "slippage". Agency trading is largely concerned with minimizing implementation shortfall.

The most common decision prices are the close price or the arrival price. If we split the decision to buy a stock from the actual trading of the stock, as is often the case with fund managers (decision makers) and brokers (trade executors), you can see why both are used. From the fund manager's point of view, their decision to trade is often based on the closing price of the day's trading (along with the entire history of the stock, and other signals/indicators). When they decide to buy a stock the next day, it is because they believe that the price will go up from that closing price. Thus their decision price is the close price. However the broker, unless they are explicitly told what levels to buy at or what prompted the desire to buy, does not know when or why the decision was made. Their best guess is that the current price is what prompted the decision, and internally that's the price they will use to benchmark. The broker normally uses the last traded price or the "mid price" - equal to the average of the current bid and ask prices - at the time the order was received.