What is the formula for calculating the implicit cost estimate?

The formula for calculating the implicit cost estimate is accurately represented by the choice that involves multiplying the number of shares traded by the difference between the executed price and the Volume-Weighted Average Price (VWAP). This method captures the additional costs incurred due to market impact and timing when executing a trade.

Implicit costs can arise from several factors, including the market impact of orders and price fluctuations during the trade execution. The executed price reflects the actual price at which shares are bought or sold, while the VWAP serves as a benchmark to assess the efficiency of the trade. The difference between these two prices highlights the cost associated with the execution relative to the average price paid in the market over that period. By multiplying this difference by the total number of shares traded, you arrive at a comprehensive estimate of the total implicit costs incurred during the trade.

This calculation is essential for assessing trading performance and determining whether a trading strategy is effective in minimizing costs while achieving desired execution outcomes.