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Implementation Shortfall

Definition

In financial markets, implementation shortfall is the difference between the decision price and the final execution price for a trade. This is also known as the "slippage". Agency trading is largely concerned with minimizing implementation shortfall and finding liquidity.

What is 'Implementation Shortfall'

In trading terms, the difference between the prevailing price or value when a buy or sell decision is made with regard to a security and the final execution price or value after taking into consideration all commissions, fees and taxes. As such, implementation shortfall is the sum of execution costs and the opportunity cost incurred in case of adverse market movement between the time of the trading decision and order execution.

Explaining 'Implementation Shortfall'

In order to maximize the potential for profit, investors aim to keep implementation shortfall as low as possible. Investors have been helped in this endeavor over the past two decades by developments such as discount brokerages, online trading and access to real-time quotes and information.



Further Reading




Q&A About Implementation Shortfall


How can investors minimize implementation shortfall?

Investors can minimize implementation shortfall by using discount brokerages, online trading and access to real-time quotes and information.

Why can't you reduce both projected risk and cost past a certain efficient frontier?

Because reducing risk tolerance requires limiting market exposure, which in turn increases market impact costs.

What is the definition of implementation shortfall?

Implementation shortfall is defined as the difference between the execution price and the theoretical price.

How does transaction cost analysis work?

Transaction cost analysis works by determining an execution strategy that will minimize the cost of transacting for a given level of acceptable risk.

What are two parts of transaction cost analysis?

Pre-trade and post-trade analysis.

What are some developments that have helped in minimizing implementation shortfall?

Discount brokerages, online trading and access to real-time quotes and information have helped in minimizing implementation shortfall.

What is implementation shortfall?

Implementation shortfall is the difference between the prevailing price or value when a buy or sell decision is made with regard to a security and the final execution price or value after taking into consideration all commissions, fees and taxes.

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