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Advanced Trading Cost Analysis

The document discusses different methods for measuring trading costs, including volume weighted average price (VWAP) which can be misleading when one trader dominates trading and is open to manipulation. It recommends using implementation shortfall, which incorporates both explicit and implicit costs by taking the difference between an actual portfolio's return and a reference portfolio's return. Implementation shortfall has components such as explicit costs, realized gains/losses, delay costs, and missed opportunity costs.

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Ashutosh Kumar
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62 views4 pages

Advanced Trading Cost Analysis

The document discusses different methods for measuring trading costs, including volume weighted average price (VWAP) which can be misleading when one trader dominates trading and is open to manipulation. It recommends using implementation shortfall, which incorporates both explicit and implicit costs by taking the difference between an actual portfolio's return and a reference portfolio's return. Implementation shortfall has components such as explicit costs, realized gains/losses, delay costs, and missed opportunity costs.

Uploaded by

Ashutosh Kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Portfolio Execution, Monitoring

and Rebalancing

Trading Costs
Volume weighted average price (VWAP)

Weighted (based on volumes) average of


execution price
Misguiding when trader dominates trading
Easily manipulated but still better than opening
price as measurement index
Recognize implicit but not explicit costs

Trading Costs
Implementation Shortfall

Most accurate as cannot be easily manipulated


Incorporates both explicit and implicit costs
Difference between actual portfolios return and
paper (reference) portfolios return
IS

Re ference portfolio gain actual portfolio gain


Re ference portfolio investment

Trading Costs
Implementation Shortfall components
Explicit cos ts

Re alized gain / loss

Delay costs

(commision , fee, taxes etc.)


Re ference portfolio investment

execution price previous day close shares purchased


X
benchmark price
shares ordered

previous day close benchmark price shares purchased


X
benchmark price
shares ordered

Missed opportunity cos ts

cancellation price benchmark price shares NOT purchased


X
benchmark price
shares ordered

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