Definition
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.
A TWAP algo on an Indian exchange slices a parent order into equal-sized child orders released at regular intervals, for example every minute over an hour. Because it ignores intraday volume patterns, TWAP is simple and predictable but can trade against thin liquidity at quiet times.
TWAP suits situations where the trader wants steady, time-based participation and is less concerned about matching the day's volume profile. It is often used for less liquid mid- and small-cap stocks where a VWAP schedule would be distorted by erratic volume, or when a client simply wants a clock-driven execution.
Related terms
- Execution AlgorithmAn 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.
- 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.
- Percentage of Volume (POV)Percentage of Volume, also called participation rate, is an execution algorithm that keeps the order's trading volume at a fixed percentage of the market's total volume until the order is filled.
- 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.