- VWAP
VWAP is a trading
acronym for Volume-Weighted Average Price, the ratio of the value traded to totalvolume traded over a particular time horizon (usually one day). It is a measure of the average price astock traded at over the trading horizon.VWAP is often used as a trading
benchmark by investors who aim to be as passive as possible in their execution. Manypension fund s, and somemutual fund s, fall into thiscategory . The aim of using a VWAP trading target is to ensure that the trader executing the order does so in-line with volume on the market. It is sometimes argued that such execution reducestransaction costs by minimizingmarket impact (the adverse effect of a trader's activities on the price of a security).VWAP can be measured between any two points in time but is displayed as the one corresponding to elapsed time during the trading day by information provider.
VWAP is often used in
algorithmic trading . Indeed, abroker may guarantee execution of an order at the VWAP price and have a computer program enter the orders into the market in order to earn the trader'scommission and create P&L. This is called a Guaranteed VWAP execution. The Broker can also trade in a best effort way and answer to the client the realized price. This is called a VWAP target execution, it incurs more dispersion in the answered price compared to the VWAP price for the client, but a lower received/paid commission.Formula
The VWAP is calculated using the following formula::
where:
: = Volume Weighted Average Price: = price of trade j: = quantity of trade j: = each individual trade that takes place over the defined period of time, excluding cross trades and basket cross trades.
ee also
*
Electronic trading
*Algorithmic Trading Platforms External links
* http://www.tradeingroups.com/amex-fro-settlement-index-vwap/ Basic VWAP overview (easy to understand)
* http://www.manuhack.com/vwap Free daily VWAP data for Hong Kong stock market
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