What you will learn
- Queue priority
- Partial fills
- Adverse selection
- Stop execution
Queue priority
A marketable order consumes eligible opposing liquidity under its terms. The average fill can worsen as size reaches additional price levels. Measure the quantity-weighted execution price rather than using only the best quote.
Partial fills
A resting limit order can wait behind other eligible interest. A traded price at its limit does not prove its queue was reached. Without order-level evidence, a fill model should state how queue uncertainty is handled.
Adverse selection
Cancellation competes with market events. A fill can occur before a cancel is effective, leaving real exposure despite the intention to withdraw. Reconcile acknowledgement and execution records rather than assuming local request order equals venue event order.
Stop execution
Adverse selection occurs when fills tend to arrive before unfavorable subsequent movement. A passive price advantage can be offset by which orders actually fill. Compare filled and unfilled opportunities without conditioning only on favorable outcomes.
Worked example
A buy for three units fills one at 100 and two at 101. Its weighted average is 100.67, approximately. Reporting the best quote of 100 as the fill understates the cost of size.
Try it yourself
Calculate the average for two units at 99 and three at 100. Explain what additional information is required to compare this with a benchmark.
Show the worked solution
The average is (198+300)/5 = 99.6. A cost comparison also needs direction, benchmark price and timestamp, multiplier, fees and the order's intended quantity.
Apply this to your course project
Compare implementation shortfall under multiple order policies.
Keep the calculation inputs, assumptions and decisions with your work. Practical exercises are self-reviewed; the scored knowledge checks assess the questions shown, not an independent certification of practical competence.