{"id":39944,"date":"2024-08-07T11:12:55","date_gmt":"2024-08-07T11:12:55","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=39944"},"modified":"2026-03-17T20:13:59","modified_gmt":"2026-03-17T20:13:59","slug":"implementation-shortfall","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/implementation-shortfall\/","title":{"rendered":"Implementation Shortfall"},"content":{"rendered":"<p><script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Implementation shortfall for two sell orders A and B\",\n    \"text\": \"An order A to sell 3,000 shares is executed at $15.12. At the time the order is submitted, the market shows a $15.11 bid for 4,000 shares and a $15.16 offer for 4,000 shares. Another order, B, to sell 5,000 shares is executed at $15.14. At the time the order is submitted, the market shows a $15.15 bid for 4,000 shares and a $15.18 offer for 4,000 shares.\\n\\nThe implementation shortfall for each transaction is closest to:\\n\\nA. A = $0.03; B = $0.05\\nB. A = $0.05; B = $0.03\\nC. A = $0.04; B = $0.04\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is B. A = $0.05; B = $0.03.\\n\\nImplementation shortfall = Actual price \u2212 Expected price.\\n\\nFor order A: 15.16 \u2212 15.11 = 0.05.\\nFor order B: 15.18 \u2212 15.15 = 0.03.\"\n    }\n  }\n}\n<\/script><br \/>\n<iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/-REW7IWLGsM\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\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>\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>\n<h4>Example: Computing the Implementation Shortfall<\/h4>\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>\n<p>The implementation shortfall for this transaction is <em>closest<\/em> to:<\/p>\n<h4>Solution<\/h4>\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>\n<blockquote>\n<h2>Question<\/h2>\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>\n<p>The implementation shortfall for each transaction is <em>closest to<\/em>:<\/p>\n<ol type=\"A\">\n<li>A=$0.03; B=$0.05.<\/li>\n<li>A=$0.05; B=$0.03.<\/li>\n<li>A=$0.04; B=$0.04.<\/li>\n<\/ol>\n<h4>Solution<\/h4>\n<p>The correct answer is <strong>B.<\/strong><\/p>\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>\n<\/blockquote>\n<p><strong>Portfolio Construction: Learning Module 6: Trading Costs and Electronic Markets;<\/strong> Los 6(c): Describe the implementation shortfall approach to transaction cost measurement<\/p>\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":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[571],"tags":[],"class_list":["post-39944","post","type-post","status-publish","format-standard","hentry","category-cfa-level-iii","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 Explained<\/title>\n<meta name=\"description\" content=\"Learn what implementation shortfall is, how it is measured in trading, and how decision price and execution costs affect portfolio performance.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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