I am unable to conceptualise the grammar of the following sentence.
“VWAP is not sensitive to trade size or market conditions” - This is classify as a disavantage
Correct me if I am wrong, when you mention sensitivity, if you are sensitive means it is much being affected by other factors.
So the following statement above I am inferring that … “whatever the trade size or market conditions is, it would not affect VWAP”(Am i correct?)
This comes into conflict with the idea that on Page 23 CFAI text (last paragraph) it mentions that if you account for a large fraction of volume of the trades, VWAP is less informative.(This is a disadvantage, if you account or large fraction volume of trades, you can AFFECT the VWAP…so VWAP is sensitive to the trades…and how can it be not sensitive?)
I believe that when it talks about VWAP not being “sensitive” to size or market conditions as a disadvantage, it is not talking about what the VWAP number actually is for a given period. Rather, I think that it refers to a disadvantage of USING VWAP as a benchmark to measure trade costs. VWAP for a period is VWAP - regardless of what your trade size is. It is a static number that you’re comparing your execution price to. When compared to implementation shortfall, for example, because trade size/market conditions can result in the delay of order execution, the costs associated with that delay are considered in this approach to trade cost analysis. Whereas they are not considered in VWAP. Sorry if that’s confusing. Let me know if it doesn’t make sense, or if anyone thinks this is off…
-Doesn’t work well for high volatity environment unlike implementation shortfall which is front end urgent based which minimizes transaction costs in a high volatile environment.
-Does not take into consideration implicit costs like delays, market impact, missed trade opp cost.