Definition
Arrival Price
Arrival price is the prevailing market price at the moment a trading decision is made and the order arrives at the desk, used as the reference point for measuring implementation shortfall.
When an Indian fund manager decides to buy a stock, the mid-price at that instant becomes the arrival price. Every paisa the eventual fill deviates from it, whether due to slippage, market impact or adverse drift, counts as a cost against the strategy's intended return.
Arrival-price benchmarking is harsher than VWAP because it does not let the trader off the hook for waiting. An execution algo optimising against arrival price trades urgently enough to limit timing risk, while a passive style accepts more drift in exchange for lower impact cost.
Related terms
- Execution AlgorithmAn execution algorithm is a program that works a large parent order into many smaller child orders over time to minimise market impact and achieve a target benchmark such as VWAP or the arrival price.
- Implementation ShortfallImplementation shortfall is the difference between the price of a stock when the decision to trade was made (the arrival or decision price) and the actual average price achieved, including all explicit and implicit costs.
- Market ImpactMarket impact is the adverse price movement caused by the act of trading itself, where a large buy pushes the price up and a large sell pushes it down as the order consumes available liquidity.
- SlippageSlippage is the difference between the expected price of a trade and the price at which it is actually executed, arising from market movement, spread and limited liquidity between order placement and fill.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.