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<span id="openzim-page-title" class="mw-page-title-main"><span class="mw-page-title-main">Implementation shortfall</span></span>
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<p>In <a href="Financial_markets" class="mw-redirect" title="Financial markets">financial markets</a>, <b>implementation shortfall</b> is the difference between the decision price and the final execution price (including commissions, taxes, etc.) for a trade. This is also known as the "<a href="Slippage_(finance)" title="Slippage (finance)">slippage</a>". Agency trading is largely concerned with minimizing implementation shortfall and finding <a href="Liquidity" title="Liquidity">liquidity</a>.
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<div class="mw-heading mw-heading2"><h2 id="Decision_price">Decision price</h2></div>
<p>The decision price is the price of the stock that prompted the decision to buy or sell. The most common decision price is the close price or the arrival price. If we split the decision to buy a stock from the actual trading of the stock, as is often the case with fund managers (decision makers) and brokers (trade executors), you can see why both are used.
</p><p>From the fund manager's point of view, his decision to trade is often based on the closing price of the day's trading (along with the entire history of the stock and other signals/indicators). When he decides to buy a particular stock the next day, it is because he believes that the price will go up from that closing price. Thus his decision price is the <b>close price</b>.
</p><p>However the broker, unless she is explicitly told what levels to buy at or what prompted the desire to buy, does not know when or why the decision was made. Her best guess is that the current price at the time the order is received is what prompted the decision and thus her decision price is the <b>arrival price</b>. There is no common definition of this price, but the broker normally uses the last traded price or the "mid price" - equal to the average of the current bid and ask prices being quoted at the time the order was received.
</p><p>Brokerage firms specialize in developing algorithmic strategies, and providing them to the institutional investment community, that aid in the quest to minimise slippage from benchmarks such as implementation shortfall, <a href="Volume-weighted_average_price" title="Volume-weighted average price">volume-weighted average price</a> or <a href="Time-weighted_average_price" title="Time-weighted average price">time-weighted average price</a>. <a href="Alpha_Profiling" title="Alpha Profiling">Alpha Profiling</a> is an example of an algorithmic method of minimising implementation shortfall.
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<div class="mw-heading mw-heading2"><h2 id="See_also">See also</h2></div>
<ul><li><a href="Algorithmic_trading" title="Algorithmic trading">Algorithmic trading</a></li>
<li><a href="Market_impact" title="Market impact">Market impact</a></li>
<li><a href="Market_microstructure" title="Market microstructure">Market microstructure</a></li></ul>
<div class="mw-heading mw-heading2"><h2 id="External_links">External links</h2></div>
<ul><li><a rel="nofollow" class="external text" href="https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/trade-strategy-execution">Trade Strategy and Execution</a> (<a href="CFA_Institute" title="CFA Institute">CFA Institute</a>)</li>
<li><a rel="nofollow" class="external text" href="https://www.imperial.ac.uk/media/imperial-college/research-centres-and-groups/cfm-imperial-institute-of-quantitative-finance/events/Lillo-Imperial-Lecture3.pdf">Market impact models and optimal execution algorithms</a></li></ul>
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This article is issued from <a class="external text" title="Last edited on 2025-01-13" href="https://en.wikipedia.org/wiki/?title=Implementation_shortfall&oldid=1269119792">Wikipedia</a>. The text is available under <a class="external text" href="https://creativecommons.org/licenses/by-sa/4.0/deed.en">Creative Commons Attribution-Share Alike 4.0</a> unless otherwise noted. Additional terms may apply for the media files.
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