Definition
Execution Algorithm
An execution algorithm is a program that works a large parent order into many smaller child orders over time to minimise market impact and achieve a target benchmark such as VWAP or the arrival price.
Indian brokers offer execution algos to institutional clients to trade large blocks without revealing intent or moving the price against themselves. Common varieties are TWAP, VWAP, POV (percentage of volume) and implementation shortfall. The choice depends on the client's urgency and benchmark.
Each execution algo must be approved by the exchange and carries a strategy ID. The algo continuously decides how aggressively to post or take liquidity, balancing the cost of waiting (price drift) against the cost of trading too fast (market impact). Sophisticated versions adapt in real time to liquidity, spread and volatility.
Related terms
- TWAP (Time Weighted Average Price)TWAP is an execution strategy and benchmark that spreads an order evenly across a chosen time window, aiming to trade at the average price over that period regardless of volume distribution.
- VWAP (Volume Weighted Average Price)VWAP is the average price of a security over a period weighted by traded volume, used both as an execution benchmark and as the target for an algorithm that trades in proportion to historical volume.
- Implementation ShortfallImplementation shortfall is the difference between the price of a stock when the decision to trade was made (the arrival or decision price) and the actual average price achieved, including all explicit and implicit costs.
- Market ImpactMarket impact is the adverse price movement caused by the act of trading itself, where a large buy pushes the price up and a large sell pushes it down as the order consumes available liquidity.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.