Summary: December 17, 2008 Robert Almgren / Encyclopedia of Quantitative Finance Execution Costs 1
Execution costs are the difference in value between an
ideal trade and what was actually done. The execution
cost of a single completed trade is typically the difference
between the final average trade price, including commis-
sions, fees and all other costs, and a suitable benchmark
price representing a hypothetical perfectly executed trade.
The sign is taken so that positive cost represents loss of
value: buying for a higher price or selling for a lower
price. If a trade is not completed either for endogeneous
reasons (for example, the price moves away from an ac-
ceptable level) or for exogeneous reasons (a trader gets
sick or a system fails), then some value must be assigned
to the unexecuted shares. The cost of a portfolio transac-
tion, or a series of transactions, is computed as a suitably
weighted average of the costs of the individual executions.
Some of the costs of trading are direct and predictable,
such as broker commissions, taxes, and exchange fees.
Although these costs can be significant, they are com-