Trading Costs and Electronic Markets

Free CFA Level III: Private Markets lesson in Portfolio Construction. 36 min read, ~5,348 words.

Explicit costs (commissions, fees, taxes) are visible; implicit costs (spread, market impact, delay, opportunity cost) are far larger. Implementation shortfall measures total cost from decision to execution, the gap between the paper portfolio and the actual portfolio. Market impact increases with order size, urgency, and illiquidity, it is the dominant...