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The difference between the paper return at the decision-time price and the realized return on the executed order.
The difference between the paper return at the decision-time price and the realized return on the executed order.
Pioneered by Andre Perold (1988), Implementation Shortfall is the canonical measure of execution cost. It captures the full cost of translating an investment decision into a filled position: delay cost, market impact, spread cost, and opportunity cost on unexecuted quantity. IS is the modern preferred benchmark over VWAP for performance attribution.
Decomposes into explicit cost (commissions, fees), impact cost, and timing cost.
Alignment with the trader's decision horizon makes IS a more honest measure than VWAP.
Required reporting standard under MiFID II RTS 27/28 for execution quality.
Algorithmic trading is the use of computer programs to automate order generation, submission, and execution in financial markets. It spans systematic strategies (where the algorithm decides what to trade), execution algorithms (where the algorithm decides how to trade an existing decision), and high-frequency market-making. The defining feature is that a machine not a human produces and manages the orders.
Market microstructure is the study of how exchange mechanics shape price formation, liquidity, and execution costs. The dominant academic reference is Harris (2003) and O'Hara (1995). The dominant practitioner applications are the design of execution algorithms and the design of market-making strategies, both of which depend on a quantitative model of the order book and its dynamics.