{"id":19309,"date":"2021-08-09T16:35:31","date_gmt":"2021-08-09T16:35:31","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=19309"},"modified":"2023-01-04T09:27:20","modified_gmt":"2023-01-04T09:27:20","slug":"describe-the-implementation-shortfall-approach-to-transaction-cost-measurement","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-implementation-shortfall-approach-to-transaction-cost-measurement\/","title":{"rendered":"Implementation Shortfall"},"content":{"rendered":"\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/-REW7IWLGsM\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n<p>The <strong>implementation shortfall approach<\/strong> involves taking the difference between the prevailing price and the final execution price when a buy or sell decision is made concerning security. This technique solves the challenges of the effective spread method. It consists of <strong>market impact costs<\/strong>, <strong>delay costs<\/strong>, and <strong>opportunity costs<\/strong>.<\/p>\r\n<p>The prevailing price is the midquote price at the time the trade decision is made. Investors aim at minimizing implementation shortfall for them to maximize profits.<\/p>\r\n<h4>Example: Computing the Implementation Shortfall<\/h4>\r\n<p>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 is a slight delay in the trader\u2019s request and the trader finally gets the order at $56.42.<\/p>\r\n<p>The implementation shortfall for this transaction is <em>closest<\/em> to:<\/p>\r\n<h4>Solution<\/h4>\r\n<p>$$ \\begin{align*} \\text{Implementation shortfall} &amp; = \\text{Actual price}-\\text{Expected price} \\\\ &amp; =$56.42-$56.38 \\\\ &amp; =$0.04 \\end{align*} $$<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>An order A to sell 3,000 shares executed for $15.12 is made. At the time the order is submitted, the price is a $15.11 bid for 4,000 shares, and the offer is made at $15.16 for 4,000 shares. There is yet another order, B, to sell 5,000 shares executed at the cost of $15.14. At the time the order is subimtted, the price is a $15.15 bid for 4,000 shares, and the offer is made at $15.18 for 4,000 shares.<\/p>\r\n<p>The implementation shortfall for each transaction is <em>closest to<\/em>:<\/p>\r\n<ol type=\"A\">\r\n\t<li>A=$0.03; B=$0.05.<\/li>\r\n\t<li>A=$0.05; B=$0.03.<\/li>\r\n\t<li>A=$0.04; B=$0.04.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is B.<\/strong><\/p>\r\n<p>$$ \\begin{align*} \\text{Implementation shortfall} &amp;=\\text{Actual price}-\\text{Expected price} \\\\ \\text{For order A } &amp; : $15.16-$15.11=$0.05 \\\\ \\text{For order B } &amp; : $15.18-$15.15=$0.03 \\end{align*} $$<\/p>\r\n<\/blockquote>\r\n<p>Reading 46: Trading Cost and Electronic Markets<\/p>\r\n<p><em>LOS 46 (c) Describe the implementation shortfall approach to transaction cost measurement.<\/em><\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>The implementation shortfall approach involves taking the difference between the prevailing price and the final execution price when a buy or sell decision is made concerning security. This technique solves the challenges of the effective spread method. It consists of&#8230;<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,473],"tags":[216,564],"class_list":["post-19309","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-portfolio-management","tag-cfa-level-2","tag-portfolio-management","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Implementation Shortfall - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"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.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/describe-the-implementation-shortfall-approach-to-transaction-cost-measurement\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Implementation Shortfall - 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