Wednesday, November 21, 2012

TWAP - basics

TWAP has multiple meanings

1) twap is name of an Execution benchmark

2) twap is name of a trading strategy that aims to beat twap benchmark

Executes an order evenly over a user defined time period. Unlike VWAP, scheduling is done on an even basis rather than trying to
anticipate the volume curve of the period as VWAP does. Higher risks of market impact when market volume is ultra low but our
stragegy continues to send the same order size at the same pace as before -- our orders would likely become large orders causing
deep impact.

Can work well as an alternative to VWAP over short periods, particularly into the close.

Basic illustration of vwap vs twap benchmark -- Suppose there are only two trades during 10-11am:
- 100 shares for $10 at 10am
- 10000 shares for $11 at 10:30am
* The TWAP is $10.50 because the last traded price was at $10 for 30 minutes and at $11 for 30minutes
* The VWAP is $10.99 -- a more realistic reflection of the price one would likely get

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http://www.linkedin.com/in/tanbin