 # Question on implementation shortfall.

Refer to CFI textbook Vol 6. Practice problem. Q10 for Reading 44. They use the following formula and take mid quote as benchmark price to calculate implementation shortfall. I don’t understand why. Trade size × (Benchmark price − Trade price). Can anyone explain ? Also, where could I find the above formula in the textbook?

Trade size x (benchmark price - Trade price) Some display problem on the formula, retype again.

Whenever you have to use Price Benchmark remember these formulas to calculate Total Transaction cost. 1) For sell orders Total cost = ( Benchmark Price - Trade price ) Volume 2) For Buy Orders Total Cost = ( Trade Price - Benchmark Price) Volume Benchamark Price Could be any of these prices : Mid quote ( Used for IS estimate of Total Cost) VWAP ( Can be gamed ) Opening Price (Can be Gamed) Closing Price (Can be Gamed)

When you use any of these as Benchmark Prices, remember that Benchmark Price refers to the price on the Day BEFORE you entered your order. CAPTAIN BARBOSA - can you confirm that you agree too? Mid quote ( Used for IS estimate of Total Cost) VWAP ( Can be gamed ) Opening Price (Can be Gamed) Closing Price (Can be Gamed)

> > Can anyone explain ? Also, where could I find the > above formula in the textbook? Footnote 20 pg 16 Benchmark price, i.e., decision price can usually be one of those two.

Thanks all. Midquote at the time the decision is made is used for IS as benchmark price.