Themis Trading: Improving VWAP Performance

October 7, 2014 | By: Flex Advantage

This morning’s note is intended to give a cursory refresher course on how VWAP works, talk about how typically our industry has gone about trying to improve VWAP performance, and finally to tell you how we think the industry should go about trying to improve VWAP performance.


Volume Weighted Average Price (VWAP) institutional trading strategies date back at least to our time at Instinet in the 1990s. The stock market was hot back then, and foreign fund managers were at least as eager to buy US equities as taxi drivers and barbers. Overseas clients going home for the day would give their US stock orders to their US brokers each morning, and get their fills back from them the following morning.

Comparing the fills to the intraday charts was a sometimes sad and sometimes humorous exercise. You see, some of those US brokers took their best execution duties less seriously than they should have. As a matter of fact, the sarcastic slang terms “Really?” and “Are you F$%$ing Kidding Me?” and “WTF?” were first coined by London traders first receiving back their US execution fills T+1. Contests were actually had nightly in London pubs over who got the day’s worst fills. These London traders dreamed of a day where they could hope for a marginally average, and not-horrifically-bad, trade execution – and the VWAP benchmark was born.

Buy-side firms have generally embraced the VWAP concept through the years. In fact some firms based their traders’ compensation on their executions versus VWAP. Slicey Dicey VWAP Algorithms were developed, and have become a staple in nearly all bulge firm algorithmic suites. Although these algorithms have varied sophistication, their general premise is to provide an average, or mediocre, execution. Traders embrace them because, while they will never “hit a home run”, they generally don’t strike out either – at least in large cap stocks if their volume participation is kept in check. As more traders execute trades using VWAP concepts, the day’s volume curve has increasingly become more predictable, and a self-fulfilling prophecy.

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