if the market is upward trending and we are buying , then we prefer IS to minimize the cost of delay , price impact and missed trade opporunity. But I am thinking what if we are SELLING in the upward trending market, should we still use IS or VWAP?
VWAP would maximize profits if selling in upward trending market - but where are you seeing questions asked on which algorithm to use based on market direction? I thought it was all based on liquidity (bid/ask), %ADV, and urgency?
And the reason why? VWAP is biased toward the price with higher volume. Since the market is upward trending, VWAP will biased towards most recent higher price vs IS front-loads trades, and the missed opportunity cost will be larger, therefore VWAP overweighs IS. Is that right? I always struggle with how those exactly work…
VWAP executes throughout the day, with higher volumes receiving the bias, not so much higher prices. If selling and market is moving up, more of the trade will be done at higher prices. IS is front loaded, meaning more of the trade is done at the lower prices early in the day.
Thanks all for the responses! This makes sense! I like the VWAP answer.
I only saw one morning question using IS because it is upward trending and we are buying a security. I jus thought this is a highly testable topic so I made up this question… LOL