Implementation shortfall
The gap between a paper portfolio assumed to trade instantly at the decision price and what was actually achieved. It counts every cost: delay, market impact, fees and the opportunity cost of orders left unfilled.
Where you will meet it
Implementation shortfall appears in 5 learning outcomes on the CFA syllabus. A few of them:
- Contrast the reference prices used to judge trade execution
“Pre-trade benchmarks are known before trading starts: the arrival price, the mid-quote when the order reaches the trader, suits urgent orders and separates delay cost from execution cost within implementation shortfall, which is itself measured from the decision price, while the previous close is sometimes used for index-related trades.”
- Explain how implementation shortfall measures the cost of trading
“Implementation shortfall compares a paper portfolio, traded instantly at the decision price with no costs, against the actual portfolio.”
- Explain what usually decides which class of trading algorithm is chosen
“The main classes are schedule-based algorithms (VWAP, TWAP and percentage of volume), arrival price or implementation shortfall algorithms, liquidity-seeking algorithms that search lit and dark venues, and algorithms that target the close.”
- Explain how the cost of a trade is measured and work out that cost
“Implementation shortfall compares a paper portfolio traded instantly at the decision price with the real one.”
See also
Market impact · Opportunity cost
Practise it
Practise implementation shortfall until it is automatic: questions that explain every wrong option.
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