Definition
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.
A VWAP execution algo front-loads or spreads child orders to match the expected intraday volume curve, which on Indian equities is typically U-shaped, heavier near the open and close. Beating VWAP means an institution bought below, or sold above, the day's volume-weighted average, a common measure of execution quality.
VWAP is popular with fund managers because it is an objective, transparent benchmark that the dealing desk can be measured against. Its weakness is that, in a strongly trending stock, tracking the volume curve forces the trader to chase the move rather than control the implementation shortfall against the arrival price.
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.
- 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.
- 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.
- 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.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.