Implementation Shortfall

Abstract

Implementation shortfall refers to the total cost of buying or selling a set of securities or of transitioning from one set of securities to another. It comprises the explicit costs of commissions and bid-ask spreads as well as implicit costs such as market impact and the opportunity cost of transacting at what may be disadvantageous prices. A comprehensive analysis of implementation shortfall uses a unique sample of 800,000 security transactions to provide information on component costs and methods of trading. Market trades cost nearly six times more than internal crosses. An adjustment to implementation shortfall to account for liquidity and risk makes it possible to compare the quality of portfolio transitions.