Post-Trade Analysis Metrics Definitions

After executing a transaction, Kissell Research Group provides various metrics for analyzing the results of a transaction. For an example using these metrics, see Analyze Trading Execution Results.

For details about these calculations, contact the Kissell Research Group.

Implementation Shortfall

Implementation shortfall (IS) determines the total cost of implementing an investment decision. IS subtracts the actual return from the paper return of a stock or portfolio after including all visible costs including commissions, fees, and taxes. The Kissell Research Group IS cost formula decomposes costs into fixed, delay, execution, and opportunity cost components.

IS Component	Description
Fixed cost	Cost component that is not dependent upon the implementation strategy.
Delay cost	Cost component that represents the loss in investment value between the time the managers make the investment decision and the order releases to the market.
Execution cost	Cost component that is the difference between the execution price and the stock price at the time the order releases to the market.
Opportunity cost	Cost component that represents the foregone profit or loss resulting from not being able to execute the order to completion within the allotted time period.

Portfolio managers and traders use IS to understand the trading cost environment.

Alpha Capture

Alpha capture, or profit, is the realized profit divided by the potential profit. Realized profit is based on the difference between end price and average execution price. Potential profit is based on the difference between end price and arrival price. Portfolio managers and traders use alpha capture to measure portfolio performance.

Benchmark Costs

The benchmark cost compares the average execution price to a specific benchmark price. A benchmark price can be any price such as the close price. Traders use benchmark costs to measure strategy and transaction performance.

Broker Value Add

The broker value add metric is a measure of the overall broker performance. A positive value indicates that the broker performed better than expected and a negative value indicates the broker under-performed expectations. This metric is the difference between the estimated trading cost and the actual cost incurred by the investor. You can estimate trading costs using marketImpact, priceAppreciation, and timingRisk. This metric reflects performance given all market conditions on the day and buying and selling behavior from all other participants.

Traders use this metric to measure broker performance.

Z-Score

Z-Score is the broker value add metric divided by timing risk. You can estimate timing risk using timingRisk. The Z-Score specifies the number of standard deviations away from the estimated cost. If the Z-Score is greater than or equal to two standard deviations, then the actual cost varies greatly from the estimated cost.

Traders use this metric to measure broker performance.

References

[1] Kissell, Robert. “The Expanded Implementation Shortfall: Understanding Transaction Cost Components.” Journal of Trading. Vol. 1, Number 3, Summer 2006, pp. 6–16.