Algo Trading, when to use which?

CFA Level III
#1

Can someone help me out with when to use Implementation Shortfall, VWAP and TWAP?

The Schweser notes don’t seem to elaborate a lot on this, but I’ve ran into several questions and seems to get them wrong.

TWAP - time weighted average price, trades the order throughout the day, usually used for thinly traded stocks. Keep chipping away at it sort of thing

VWAP - volume weighted average price, mimics the volume throughout the day. Not sure when do you use this?

Implementation Shorffall - minimizes opportunity cost, use this when you need to get an order executed fast and early in the day.

Any more insights anyone can provide? Thanks.

#2

Yea I was getting caught up on this too. Still am a little but there are circumstances like hi/lo urgency, size of the order relative to volume, and such…they’re in the books. But one takeaway I got today was that you want to use IS in an upward trending market. It minimizes opportunity cost, which is of particular concern in a trending market

#3

VWAP = small bid/ask spread, small size, trades throughout the day and not urgent

TWAP= flat trade, good for thinly traded, trades are with respect to time.

Implementation shortfall= front load, urgent, fast, risk averse, cost effective, urgent, low bid/ask, small size

Electronic crossing network= batches, anonymous, large orders, specific point in time, used by institutions, low cost, used to avoid impact of large volume trades.

Principal trade= used for urgent and block transactions (through broker)

Portfolio trade = small cost and + for diversification.

i hope this helps.

#4

This is helpful. Thanks.

#5

And yes, if the market is trending or a big news is about to come. Use Implementation Shortfall because the trade has high urgency!

#6

Trending part depends if your a buyer or seller. If your a buyer upward trending is bad, if your a seller upward trending is good. Just think about how the trading programs execute the orders.

#7

Brilliant Bilal, good summary.

#8

:slight_smile: i hope this pays off this year.

#9

Lets hope mate, we are second timers and need to get over this :slight_smile: Good luck mate!

#10

You too ^^ best of luck (last year i failed level 6)… i started studying 2 months ago i dont feel its enough but hoping for the best…