Reference price benchmarks

Reference price benchmarks for trade execution are used to determine expected trading costs, which enables managers and traders to select the optimal strategy for a trade. Reference prices are also a key input in the calculation of the actual cost of trading for post-trade evaluation.

Reference Price Benchmarks

Reference prices can be categorised as pre-trade, intraday, post-trade or price target. On this page, we discuss the main characteristics of each of these categories in more detail.

Pre-trade benchmarks

There are at least four different pre-trade benchmarks. These benchmarks are known before the start of the trading. These include:

  • Decision price: this is the price at the time the portfolio manager made the investment decision
  • Previous close: this is the closing price on the previous day (often used as a proxy for the decision price by quantitative managers using systematic rules-based, data driven strategies).
  • Opening price: this is the opening price on the day. Note that if a trade is to be entered into at an opening auction, which sets the day’s opening price, then this opening auction price is not a good benchmark since it can be affected by the trade.
  • Arrival price: this is the price of the security when the order is sent to the market for execution. Active portfolio managers trying to generate alpha will often specify a benchmark for an arrival price.

Intraday benchmarks

Intraday benchmarks are based on prices during the trading period. These are used by managers who trade passively over a day or funds that may be rebalanced or minimizing risk. Intraday benchmarks include:

  • Volume-weighted average price (VWAP): this is defined as the average price of all trades, weighted by volume, over the trading horizon. Managers may use the VWAP benchmark when they want to participate with volume patterns over a day.
  • Time-weighted average price (TWAP): this is the equal-weighted average price of all trades executed over the trading horizon. TWAP may be appropriate for managers who wish to remove the impact of outliers.

Post-trade benchmarks

Post-trade benchmarks are determined after trading has been completed. The most frequently used post-trade benchmark is the closing price, often used by managers who wish to execute at the closing price to reduce the tracking error of the fund.

Price target benchmarks

Price target benchmarks are prices used by profit-seeking managers aiming to earn short-term alpha, related to the manager’s view of the fair value of the security.


We discussed different reference price benchmarks used by managers and traders. The benchmark to use depends on the strategy that the manager is pursuing.