Judge how well a trade was executed
The idea
Execution is judged against the benchmark that fits the order's purpose, expressing cost in basis points: for a buy, cost = (average execution price − benchmark price) ÷ benchmark price × 10,000, with the sign reversed for a sale. Arrival price cost captures the full impact of trading; VWAP cost shows whether the trader beat the day's average price; closing price cost suits index trades. Market-adjusted cost removes general market drift by subtracting beta × the index return over the trading period, separating the trader's contribution from the market's. Results should also be compared with pre-trade cost estimates and peers. The trap is praising a fill below VWAP when the order itself made up much of the day's volume.
Formulas
Trading cost in basis points
cost in bps = (average execution price − benchmark price) ÷ benchmark price × 10,000
- average execution price
- the average price the order was filled at
- benchmark price
- the chosen benchmark: arrival price, VWAP or the closing price
As written for a buy; reverse the sign for a sale so a positive number is always a cost. Choose the benchmark to suit the order's purpose. A VWAP benchmark says nothing about the cost of waiting.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Trade Strategy and Execution
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