{"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":"2026-06-26T19:43:25","modified_gmt":"2026-06-26T19:43:25","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":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"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 another order, B, to sell 5,000 shares executed at $15.14. At the time the order is submitted, the price is a $15.15 bid for 4,000 shares, and the offer is made at $15.18 for 4,000 shares. The implementation shortfall for each transaction is closest to:\",\r\n    \"answerCount\": 3,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is B. A = $0.05; B = $0.03. Implementation shortfall is calculated as the difference between the actual transaction price and the expected price. For order A, the shortfall is $15.16 \u2212 $15.11 = $0.05. For order B, the shortfall is $15.18 \u2212 $15.15 = $0.03.\"\r\n    },\r\n    \"suggestedAnswer\": [\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"A = $0.03; B = $0.05.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"A = $0.05; B = $0.03.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"A = $0.04; B = $0.04.\"\r\n      }\r\n    ]\r\n  }\r\n}\r\n<\/script>\r\n\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\r\n<div style=\"margin: 18px 0;\"><a style=\"display: block; text-align: center; padding: 14px 18px; border: 2px solid #2F5BFF; border-radius: 18px; color: #ffffff ; font-weight: 600; font-size: 16px; text-decoration: none; background-color: #1a73e8 ;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\">Practice implementation shortfall and transaction cost concepts with our CFA Free Trial.<\/a><\/div>\r\n\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\r\n<div style=\"text-align: center; margin: 30px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 26px; border-radius: 9999px; background: #1e5bd8; color: #ffffff; font-weight: bold; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Start Free Trial \u2192 <\/a> <p style=\"margin-top: 12px; font-size: 16px; line-height: 1.5;\">Review the implementation shortfall approach to transaction cost measurement with CFA Level 2 study notes, practice questions, mock exams, and video lessons designed to strengthen your exam preparation.<\/p>\r\n <\/div>","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 v27.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Implementation Shortfall Approach | CFA Level II<\/title>\n<meta name=\"description\" content=\"Learn the implementation shortfall method for measuring transaction costs, including the difference between decision price and final execution price.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, 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