Limited Time Offer: Save 10% on all 2021 and 2022 Premium Study Packages with promo code: BLOG10    Select your Premium Package »

# Implementation Shortfall

The implementation shortfall approach involves taking the difference between the prevailing price when a buy or sell decision is made concerning security and the final execution price. This technique solves the challenges of the effective spread method. It consists of market impact costs, delay costs, and opportunity costs.

The prevailing price is the midquote price at the time the trade decision is made. Investors aim at keeping implementation shortfall small to maximize profits.

### Example: Computing the Implementation Shortfall

The bid-ask spread in a market is $56.34/$56.38. A trader places an order to purchase 1,000 shares expecting the buy order to fill at $56.38. There was a slight delay in the trader’s request. The trader finally gets the order at$56.42.

Compute the implementation shortfall for this transaction.

#### Solution

\begin{align*} \text{Implementation shortfall} & = \text{Actual price}-\text{Expected price} \\ & =56.42-56.38 \\ & =0.04 \end{align*}

## Question

An order A to sell 3,000 shares executed for $15.12 is made. Upon order submission, the price was$15.11 bid for 4,000 shares, and the offer was made at $15.16 for 4,000 shares. Another order B to sell 5,000 shares executed at the cost of$15.14. Upon submission of the order, the price was $15.15 bid for 4,000 shares, and the offer was made at$15.18 for 4,000 shares.

The implementation shortfall for each transaction is closest to:

1. A=$0.03; B=$0.05.
2. A=$0.05; B=$0.03.
3. A=$0.04; B=$0.04.

#### Solution

\begin{align*} \text{Implementation shortfall} &=\text{Actual price}-\text{Expected price} \\ \text{For order A } & : 15.16-15.11=0.05 \\ \text{For order B } & : 15.18-15.15=0.03 \end{align*}

LOS 44 (c) Describe the implementation shortfall approach to transaction cost measurement.

Featured Study with Us
CFA® Exam and FRM® Exam Prep Platform offered by AnalystPrep

Study Platform

Learn with Us

Subscribe to our newsletter and keep up with the latest and greatest tips for success
Online Tutoring
Our videos feature professional educators presenting in-depth explanations of all topics introduced in the curriculum.

Video Lessons

Daniel Glyn
2021-03-24
I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
michael walshe
2021-03-18
Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.
Nyka Smith
2021-02-18
Every concept is very well explained by Nilay Arun. kudos to you man!
2021-02-13
Agustin Olcese
2021-01-27
Excellent explantions, very clear!
Jaak Jay
2021-01-14
Awesome content, kudos to Prof.James Frojan
sindhushree reddy
2021-01-07
Crisp and short ppt of Frm chapters and great explanation with examples.