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Implementation Shortfall

Implementation shortfall refers to the difference between the actual performance of a trade and the expected performance if it had been executed perfectly. It measures the cost of trading inefficiencies, including delays, price slippage, commissions, and market impact. The goal of minimizing implementation shortfall is to reduce the gap between the intended and actual results of a trade, ensuring that trading costs and execution risks are minimized.

Example

An investor plans to buy 1,000 shares of a stock at $50 per share, but due to delays and market fluctuations, the final purchase price averages $52 per share. The $2 per share difference represents the implementation shortfall.

Key points

• Measures the cost of trading inefficiencies, including delays and price slippage.

• Aims to reduce the gap between intended and actual trade performance.

• Used to optimize trade execution and minimize trading costs.

Quick Answers to Curious Questions

Factors include delays in execution, price slippage, commissions, and market impact, all of which can reduce the expected performance of a trade.

Traders can minimize shortfall by using algorithmic trading strategies, reducing execution delays, and choosing optimal trading times.

Institutional investors need to minimize trading costs and execution risks to ensure efficient portfolio management and optimize returns for their clients.