VWAP vs. Implementation shortfall

CFA Level III
#1

I still haven’t pinned down when we use which trade. What do we use if: - trade is large compared to daily volume? - there is a large bid/ask spread? - there is higher volume at the end of the day?

#2

You use a broker. You use IS when there is higher volume in the BEGINNING of the day. You use VWAP when the trade is small compared to daily volume and its in liquid stocks (small bid-ask spread).

#3
  1. Broker 2) Large Bid/Ask - Broker 3) VWAP
#4

cfaboston28 Wrote: ------------------------------------------------------- > 3) VWAP Why ?

#5

Ok thanks, also if trade is urgent - use IS? (assuming your only choices are VWAP or IS)

#6

AMC Wrote: ------------------------------------------------------- > cfaboston28 Wrote: > -------------------------------------------------- > ----- > > 3) VWAP > > Why ? I think because IS is not suitable for the higher volume at the end of the day.

#7

yeah, IS is front-loaded, it does most of the trades at the beginning of the day

#8

cfaboston28 Wrote: ------------------------------------------------------- > AMC Wrote: > -------------------------------------------------- > > cfaboston28 Wrote: > > 3) VWAP > > Why ? > > I think because IS is not suitable for the higher > volume at the end of the day. Why not broker ?

#9

The main key to VWAP is it can be gamed. So if all your trades come at the beginning of the day and you see the stock has gone up 5 points, what would you do as the analyst? You wait til the next day so it doesnt look like you completely sucked in terms of VWAP. If all the volume happens at 3:58, then the analyst cant game VWAP. H e either has to make a move or not, without knowing what the VWAP is going to be. So high volume at the end of the day just makes VWAP tougher to game.

#10

So for part 3 (there is higher volume at the end of the day), should a broker be used or VWAP? I would have thought a broker?

#11

you need more info… it wouldnt be a bad time to use either really… If the question were to say you need to execute 1,000,000 shares of a small-cap, then you want to use a broker. If you want to execute 100 shares of GE, then you clearly wouldnt use a broker. You cant really judge these by one fact alone.