Implementation Shortfall (IS)
An algorithm designed to address the balance between alpha capture and market impact. Scheduling typically uses some historic data, but is more reactive to real-time order book volume information than most VWAP algorithms because there is no defined end time. This means inventory does not have to be managed over a defined period like VWAP, and so these strategies can speed up or slow down according to market conditions. The flexibility allows IS strategies find a balance between alpha capture and market impact. The timing of response to volume changes, especially sudden ‘spikes’ varies and this can lead to different results. Clients usually have the ability to set ‘aggressiveness’ parameters for the algorithm and in many cases can adjust this setting in response to perceived changes in market dynamics. As a result ‘user input’ may be the most important factor in determining whether the algorithm performs well or not, rather than the actual algorithm structure itself.