Volume-Weighted Average Price (VWAP) is a trading algorithm based on pre-computed schedule which is used in an execution of a bigger order without excessive impact on the market price.
The schedule is a heart of a strategy. To compute it strategy first should look in a historical data. As an input user defines the Number of Intervals and delay between each two of them. This gives us a partition of period since Start Time until End Time into intervals . Using the historical data strategy have to estimate how big fraction of a volume traded between Start Time and End Time is traded in each time interval - this values are denoted by for each time interval .
Notice that the following holds:
- for each value of
On a base of the above considerations strategy can estimate the size of a trade which should be traded in the end of each time interval to minimize market price strategy’s self-impact. For a -th time interval it is defined as follows:
Larger market participation does more impact on a market asset’s price weighted by volume, which is expressed by formula:
where is every trade. Therefore strategy tries to keep steady market participation in each of intervals.
If, defined above, predictions of volume fractions in each interval are proper then the algorithm works perfectly, otherwise it can cause huge impact on a market price. To prevent this bad situation more advance versions of this algorithm takes into the account also actual volume and modify their schedule to fit the market conditions.
- Last trade
- Best quote
- Order book
- Historical market data
|Target Quantity||Overall quantity to be realized by strategy||Yes|
|Number of Intervals||Number of intervals to be used||Yes|
|Delay Table||Delay times between following orders||Yes|
|Start Time||Time when strategy begins to submit orders||Yes|
|End Time||Time when strategy stops working||No|
|Side||Market side for orders||Yes|
Strategy opens positions every time the delay value is reached.
Strategy does not close its opened positions.
Strategy ends when the declared orders’ quantity has been realized. By design around defined End Time.
This strategy is dedicated to be used in short period of time like one day.
Further information & source¶
- Barry Johnson, Algorithmic Trading & DMA: An introduction to direct access trading strategies, 4Myeloma Press, 2010.