TWAP

Description

Time-Weighted Average Price (TWAP) is a trading algorithm based on weighted average price used to execution of bigger orders without excessive impact on the market price. It may be easy to guess trading pattern of the running strategy if its orders are not modified in a special way, so parameters can be adjusted to make strategy harder to track. The most common solutions are randomizing orders’ size and/or delay time between them. It is possible to limit quantity to not exceed a defined percent of volume particip, to miniamlize strategies’ impact on the market.

Market Data

  • Last trade
  • Best quote
  • Order book
  • Statistics

Parameters

Parameter name Description Essential
Target Quantity Overall quantity to be realized by strategy Yes
Step~Size Quantity to realize in single order Yes
Delay Delay time between following orders Yes
Start Time Time when strategy begins to submit orders Yes
End Time Time when strategy ends to submit orders No
Price Limit Price limit for orders No
Side Market side for orders Yes

Conditions

Open position

Side Buy or Sell
Amount Step Size (+/- randomized value)
Price Last market price
Type Price limit order

Strategy opens positions every time the delay value is reached and market price is not higher that strategy’s price limit. If maximum volume particip is reached, sending orders is suspended. Strategy stops its execution when order’s quantity exceed Target Quantity.

Close position

Strategy does not close its opened positions.

Termination

Strategy ends when End Time is reached or declared orders’ quantity has been realized.

Time frame

TWAP strategy works in declared period of time (if Start Time and End Time are specified) or till reaching Target Quantity. Frequency of strategy positions opening depends on Delay, Price Limit parameter and market price. Strategy can be executed in both: daily and long-term trading.

Further information & source

  • Barry Johnson, Algorithmic Trading & DMA: An introduction to direct access trading strategies, 4Myeloma Press, 2010.
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