Question 53 answer staes:
“A is correct. Moore’s statement is incorrect, only explicit costs such as the £135 commission cost should be included in assessing the trader’s performance. The missed trading opportunity cost is also a result of market movement.” -CFAI
Why now do we only care about explicit costs and not price impact, delay and cancelation costs?? I am lost on this as why to only commissions are important.
I think because those impacts are due to the movement of the markets and are not owing to execution on the part of the trader! Every trader trades would have traded the same way, they have the order they try to match it and execute it but on the side the markets keep moving. So if those 3 costs are due to the market movement.
Okayyy…so if thats the case then why do we even care about implementation shorfall calcuations and execution performance calc? I thought the whole point of IS calculations consisting of implicit and explicit costs is to judge performance of the trader? I know we can adjust IS by the MAIS but thats soemthing different than they speak of here I think
One of those…
I think we care about these costs so as to be able to choose a better trading method not a better trader ! Now if we get to Algo some of these costs could be avoided or reduced and depending on the method we choose.
Yup, okay got it, however if the trader is given discretion on how he executes a trade then we should be including these implicit costs so we can fully judge the impacts of his decisions and how well he executes our orders. If commissions is the only way to judge a trader then, me as a trader, will simply go out and only place trade with brokers who charge the smallest commissions making me looking like hero. Regardless if that broker cost me a fortune on the implicit costs such as price impacts, delay costs, and cancelation costs. I get your point here, sort of, just don’t necessarily agree with you. I realize my bickering is pointless. CFAI will always be right and fighting it is pointless. I just want to make sure I have this understood because I feel like that entire reading was about how we SHOULD NOT only be judging implementation decision on explicit costs.
This confused me also. Section 3.1 “transaction cost components” explains the CFA viewpoint, see text on market movement a few paragraphs below example 5.
Just to add if any google for this answer: Basically the book says that everything except explicit costs is random, and thus traders shouldnt be the one who bear responsibility for it.
To be clear: it isn’t that we do not care about the other costs; it’s that we don’t merely blame the trader for them.