Is there ever a reason to use VWAP over Implementation Shortfall strategy?

CFA 2010 AM exam Question 8C.

I’m wondering if there are ever scenarios where Volume Weighted Average Price (VWAP) algorithm strategy would be used over Implementation Shortfall algorithm? It seems Implementation Shortfall algorithm is better in every way except that it is "tough to understand’ and requires lots of “analysis”.

Everything else the same and if the order is urgent - use IS, if the order is not urgent - use VWAP

low spread, low % of adv, not urgent = VWAP

Other factors to consider: non-trending market. Volume is high near closing time.

The following conditions make VWAP unsuitable for a trade:

  1. if there is urgency to make the trade

  2. if the size of the order represents a very high percentage of average daily volume

  3. if there is a large bid/ask spread

large bid ask is also bad for IS, and so is trade high ADV, so you are wrong tozertt.

Also, IS may not be easily understood for inexperienced investors, and is more calculation intensive.


large bid ask is also bad for IS, and so is trade high ADV, so you are wrong tozertt.

markCFAIL- I simply stated the conditions under which VWAP is not suitable to make a trade…

since we are on this,

Does DAILY TRADE PATTERN even matter??

Intuitively, wouldn’t it at least have effect on the spread? (Higher volume = lower spread)

I am more concerned with the pattern itself than the volume. I can’t remember which exam tested this.

the question gives you the volume pattern for each case:

heavy in the begining, or heavy near the end, etc

do you remember?

It’s about front-load of I/S, not sure which year.

Higher volumes toward the end of the day would make a fron-tloaded Implementation Shortfall less suitable.

Are you sure? Does that mean that VWAP is more suitable if there is heavy volumes at the end of the day all things equal between the two? Or is there a third option better still?

Thanks, tozerrt.

1, “Urgent” makes the difference between I/S and VWAP. 2, Higher volume at end of the day will make the front-loaded I/S less suitable. 3, VWAP works best for comparing smaller trades in non-trending markets.

My previous post looks incorrect.

Just reviewing one of my Schweser practice exams where it compares the justification of different algorithmic trading strategies… For VWAP, it gives the following three reasons: (1) narrow spread, (2) low urgency, (3) small relative daily volume. Implementation Shortfall is part of the same question, and its justification is “high urgency level”.