Question

Based on the prior closing price of $15.71, you place a limit order to buy 11,200 shares in ANZ Banking Group Limited (ANZ) at $15.90. Brokerage fees, including all explicit fees, are $0.02 for each share purchased. As the market quickly rises, your order is only partially filled with trades executed as follows:

Time(t)	Volume	Trade Price	Bid Price	Ask Price
Open		$15.78	$15.78	$15.78
10:01	4,990	$15.82	$15.80	$15.82
10:02	3,120	$15.85	$15.84	$15.86
10:02	1,890	$15.90	$15.89	$15.90
Close		$16.10

a) Using the spread midpoint as your benchmark, what are the total implicit transaction costs for this order?  

b) Briefly explain why implementation shortfall might be a better measure to understand the total cost of trading. Calculate the cost of your implementation shortfall. Show your working and disaggregate the cost into explicit and implicit components.

Answer 1

a) The transaction cost for 4,990 shares is 4,990*($15.82 + $0.02) = 4,990 * $15.84 = $79,041.60

The transaction cost for 3,120 shares is 3,120*($15.85 + $0.02) = 3,120 * $15.87 = $49,514.40

The transaction cost for 1,890 shares is 1,890*($15.90 + $0.02) = 1,890* $15.92 = $30,088.80

Total 10,000 shares $158,644.80

Total transaction cost is $158,644.80 for 10,000 shares, i.e. $ 15.86 per share

b) Since there is a shortfall of 1,200 shares in the present transaction, implementation shortfall might be measure to understand the total cost of trading as the balance number of 1,200 shares could have been purchased only at the closing price of $16.10 plus the brokerage and other fees of $0.02.

The cost of the implentation shortfall is 1,200*($16.10 + $0.02) = 1,200*$16.12) = $19,344