# VWAP Vs TWAP

Can someone explain the difference bet the two. Fo TWAP, reading says you will hold the volume constant and exectue the trade over various time period. but I cant seem to really nail it down. Also can someone explain market adjsted impl shortfall? thanks

I think time weighted would execute the order say 100 shares every 15 mins. Volume weighted will execute the the order say as a percentage of average daily volume & time. Just my interpretation.

Thought % of daily volume would be the % of volume method where they take a certain % of average trading volume and execute those trades. Isn’t VWAP just a way to break up the trade throughout the entire day without the use of a specific formula?

MA impl shortfall just reduces IS by market price adjustments. Thinking here is that trader doesn’t have control over price movements so shouldn’t get penalty/credit for them. A VWAP trading algorithm aims to minimize VWAP. A TWAP algorithm spreads it out through the day.

Too old for this: thanks. can you pls pls explain a little bit further. I think am gettign there but needs bit more help on both.

You might be confused by two instances where VWAP appears in the material. First, VWAP is Volume Weighted Avg Price, it’s used to measure how good a price the trader is getting in the market relative to what everyone else is trading at. VWAP is the execution price everyone got, on average. If the trader did better (higher on a sell or lower on a buy) then he did good. Second, Simple Logical Participation trading algorithms sometimes are set up to trade in order to beat VWAP. Earlier, I said “aims to minimize VWAP”, but actually I meant, “aims to beat VWAP”. Don’t ask me how a VWAP algorithm would work, that’s probably a question for compscikid.

Thanks. with regard to market adjs impl shortfall, the CFA book uses an example and arrives at IS cost of 87 bp. and then proceeds to deduct 100bp based on mkt movement and then finally says the market adj IS is -13 bp. does it mean they ended up being down 87 bp to up 13 bp?

That’s correct. They had a -13bp which is good.

yes, the bought 87 bps higher (bad)… but the reason was that the overall market went up by 100 bps… so they actually did 13 bps better than the market (good)

Hey guys…I was gunna write a separate topic for my Q but figured i’d post it here… For implementation shortfall…specifically Realized Profit/Loss…CFA text pg 303 uses Decision Price in the denominator… but then on pg A-24…for an end of chapter problem…CFA uses previous day close in the denominator…the \$9.99… 1 of them has to be wrong…so what is it A) Decision Price in the demoninator? B) Previous Day Close in the demoninator?

Maybe I should have started a new thread… I’m gunna bump this puppy

in page 303, 10 gbp is actually previous day close

Are you sure…I thought there was a day in there where nothing happens…so the previous day close would be that day So monday decision- \$10 tuesday nothing- close (not sure what price, but I belive diff than 10) wednesday- trade executed …and then use 10… hala do u typically use decision price or previous close in denominator?

9.99 in the denominator in this problem is wrong, it should be 10.00. It has no effect on the problem since 9.99 and 10.00 are so close, but if you want to convince yourself, assume some extreme numbers (say close price was 5.00 instead of 9.99, and the order was executed at 8.00 instead of 10.08), then replug this numbers and solve the proble two ways: 1) calculating implementation shortfall using (return oon paper portfolio - return on actual portfolio) / cost of paper portfolio 2) calculating each component separatelly and then adding them Granted that 5.00 and 8.00 are obscure numbers, but that will ilustrate to you that if you plug 5.00 in denominator like 9.99 is used in the problem, the implementation shortfall calculated using method #2 would be different from #1; and if you use 10.00 in the denominator both methods will give the same number; also when using 5.00 and 8.00 you need to adjust delay cost apporpriatelly I meant to report this to CFAI as errat, but its to late in the game at this point