%0 Journal Article %A Kwaku Abrokwah %A George Sofianos %T Shortfall Surprises %D 2007 %R 10.3905/jot.2007.688944 %J The Journal of Trading %P 11-31 %V 2 %N 3 %X In this article we use a large sample of order executions to better understand “shortfall surprises”: the difference between actual and expected trading costs. On average, only 20% of actual shortfall is predictable pre-trade. We investigate five possible reasons for the shortfall surprise: the underlying stock-specific price move (alpha), the market move, and the volume, volatility and spread surprises. We find that the underlying price move (alpha and market) is by far the most important factor explaining the shortfall surprise. For orders in large-cap stocks that take more than an hour to execute, for example, the price move explains 73% of the shortfall surprise. We also find that the alpha component dominates the price move. Surprisingly, volume surprises explain very little of the shortfall surprise: higher-than-expected volume does not reduce trading costs. Similarly, the volatility and spread surprises have little explanatory power. Our findings have important implications for post-trade analysis, pre-trade tools, the development of algorithms and the choice of the right execution strategy.TOPICS: Accounting and ratio analysis, statistical methods, volatility measures %U https://jot.pm-research.com/content/iijtrade/2/3/11.full.pdf