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Implementation Cost


A measure of trading inefficiency– i.e., it measures the cost of trade implementation. For purchases (long positions), it is equal to the decision price or desired price (the price prevailing at the time a trader/investor decides to trade- i.e., submits the order to the buy-side trading desk) minus the average execution price (actual price or transaction price or arrival price), including commissions, all related to the decision price. For sales (short positions), it is equal to the execution price minus the decision price.

Implantation cost consists of delay cost, market impact, commission, and trade opportunity cost. It was first developed by Jack Treynor (1981) and later further developed by Andre Perold (1988).

This measure is also known as implementation shortfall.



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