Transaction Costs & Implementation

A paper portfolio can change its mind for free, while a real one pays every time. Each rebalance crosses the spread, and large orders move prices against you because market impact grows with order size and shrinks with liquidity. Execution desks slice parent orders into schedules like VWAP that trade patience against price risk. An optimizer ignoring these frictions produces turnover-heavy allocations whose alpha is consumed in implementation. The fixes add an explicit cost term, cap turnover relative to the current book, and optimize from existing holdings rather than a blank slate. The same logic sets capacity: as assets grow, a fixed signal supports fewer basis points of net edge.