Vwap
Volume-weighted average price: the average price of all trades over a period, each weighted by its size. A common intraday benchmark, but a very large order moves it and so flatters its own execution.
Where you will meet it
Vwap appears in 6 learning outcomes on the CFA syllabus. A few of them:
- Contrast the reference prices used to judge trade execution
“Intraday benchmarks, VWAP and TWAP, suit orders worked through the day; VWAP can be gamed through timing and means little when the order is a large share of volume.”
- Compute effective spreads and VWAP-based estimates of transaction cost, and explain what they show
“The VWAP measure compares the average execution price with the market's volume-weighted average price.”
- Propose a trading strategy suited to given facts and defend the choice
“Large order, low urgency: schedule-based (VWAP or TWAP) or liquidity-seeking execution that minimises impact, possibly over days.”
- Explain what usually decides which class of trading algorithm is chosen
“The main classes are schedule-based algorithms (VWAP, TWAP and percentage of volume), arrival price or implementation shortfall algorithms, liquidity-seeking algorithms that search lit and dark venues, and algorithms that target the close.”
Practise it
Practise vwap until it is automatic: questions that explain every wrong option.
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