In the answer key for the implementation shortfall answer (8C), it says “Such a trading strading breaks up the order and seeks to minimize the weighted average of market impact costs and missed trade opportunity costs.”
Two questions:
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I thought there was no concept of “breaking up the order” in implementation shortfall–unlike simple logistical participation, the point is to trade as much and as early as possible.
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I thought implementation seeks to minimize opportunity cost, not the “weighted average of the market impact and missed trade opportunity costs.”
I guess they both fall under “minimising costs and risks” associated with trading - applicable to algos in general…
I think implementation shortfall does its best to minimize both opportunity cost and market cost, though the focus is on opportunity cost. Schweser Book 5 Page 27 says “An objective function can be specified using implementation shortfall tha seks to minimize market impact costs and opportunity costs, as wella s the variance of the cost of trading.”
So I think the main goal of implementation shortfall is opportunity cost, but has an objective function to try to do both. And even if it attempts to trade early, it will try to minimize both costs.