Time Weighted Average Price (TWAP) - AlgoJi

Time Weighted Average Price (TWAP) is an execution strategy which trades in slices of Order Quantity at regular intervals of time as specified by user. While executing, it adds randomization as per an algorithm to minimize gaming risk. The actual algorithm to achieve TWAP is usually proprietary and closely guarded secret.

Example: “Spread it out today”- Buy 100,000 shares spread evenly between Market Open and Close auctions with a volume limit of 20%

When & Why to chose TWAP?

  1. When executing large orders in a given time window
  2. When expecting adverse price movement with high volume; TWAP may give better execution price than VWAP in such case
  3. To minimize the market impact by not executing large volume too quickly
  4. The strategy may use iceberg orders or disclose minimal order quantity to reduce price impact
  5. Useful when a methodological and predictable execution schedule is required
  6. Can also be used on illiquid stocks with %Volume limit

Strategy Parameters:

(Given below are some general parameters to help you decide what is essential for you; the actual strategy parameters will depend upon your broker)

Start Time: Any orders are not sent to market even if the decision logic generates buy/sell signal before Start Time.

End Time: All open orders are completed before End Time irrespective of the market impact

%Volume: The strategy automatically adjusts the participation rate to limit it to the percentage of stocks total traded volume. Example, if the stock trades 100,000 shares in one minute and %Volume is 10, the strategy will trade 10,000 shares in the same minute.

Price Brand: The desired price band for the average traded price. If market moves beyond the price band limit, the order will not be completely executed