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From the fund manager's point of view, his 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 he decides to buy a particular stock the next day, it is because he believes that the price will go up
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The decision price is the price of the stock that prompted the decision to buy or sell. The most common decision price is 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
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However the broker, unless she is explicitly told what levels to buy at or what prompted the desire to buy, does not know when or why the decision was made. Her best guess is that the current price at the time the order is received is what prompted the decision and thus her decision price is the
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Brokerage firms specialize in developing algorithmic strategies, and providing them to the institutional investment community, that aid in the quest to minimise slippage from benchmarks such as implementation shortfall,
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is the difference between the decision price and the final execution price (including commissions, taxes, etc.) for a trade. This is also known as the "
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is an example of an algorithmic method of minimising implementation shortfall.
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brokers (trade executors), you can see why both are used.
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from that closing price. Thus his decision price is the
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Market impact models and optimal execution algorithms
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