# Implementation shortfall and VWAP

Which is correct? A. Implementation shortfall will always be greater than zero if any portion of the original order goes unfilled and is cancelled. B. VWAP is more appropriate for small trades in non trending markets.

B. VWAP is not suitable for large trades that may have large market impact ie: effect on price, particularly in trending markets. What I’m struggling with is deciding why A is false.

A is false because if a portion of an order is unfilled and then stock ends up below your benchmark price (price at which decision to buy was made), the implementation shortfall can become negative (i.e., making it sort of negative implicit cost)

A is false because it says “will always be”, and that is always false in the cfa world. Anyway, I agree with volkovv, the price can move in the opposite direction, leaving the “benchmark paper price” or whatever as a worse price than the one you get on your filled order. I just did an example, hope it helps: + Stock closes on friday @ 20 usd + Monday morning, y enter order to buy 1,000 stocks @ 19 usd. Never gets to 19 usd, the order expires unfilled. The stock closes @ 19.10 usd + Tuesday morning, the order is revised to a limit of 19.20 usd. 800 shares are bought. The stock closes @ 19.30 usd. The order for the remaining 200 shares is cancelled. Commission is 18 usd 1. Explicit costs = 18 / (20 x 1,000) = 0.09% 2. Realized p/l = [(19.20 - 19.10) / (20)] x [800/1,000] = 0.4% 3. Delay costs = [(19.10 - 20) / (20)] x [800/1,000] = -3.6% 4. Missed trade op.cost = [(19.30 - 20) / (20)] x [200/1,000] = -0.7% Total = 0.09% + 0.4% - 3.6% -0.7% = -3.81% If you do it without each leg: a. gain on the paper portfolio = 1,000 shares x (19.3 - 20) = -700 b. gain on the real portfolio: + investment = 800 x 19.20 + 18 = 15,378 + terminal value = 800 x 19.3 = 15,440 + gain on the real portfolio = 15,440 - 15,378 = 62 c. imp.shortfall = (-700 -62) / (1,000 x 20) = -3.81%

If you are buying; your order only got 80% filled and stock price went down. That is a good thing===>implemenation cost can be negative. If you are selling, your order only got 80% filled and stock price went up. That is a good thing===>implemenation cost can be negative.

A can easily be negative. I placed an order for BSC @ 30, and it never got executed… I WIN!

^LOL…point well said and taken.

always assume extreme cases - that makes true false questions trivial. One thing that is also very useful is proof but contradiction.