# VWAP

I’m confused on EMPLOYING a VWAP algorithm strategy. I get how the trader would comp his price paid to the market by calculating his VWAP vs. total day’s VWAP, and wants to show how much lower he is… I know its not good for high urgency trades, or large spreads, or a large portion of the days volume. But what is the actual strategy he employs? He sits and waits for the ask price to fall below the days VWAP and executes the buy orders at those points?? does the stock’s trading pattern mean anything (more liquid in AM or PM?)

I think in VWAP you need to split big order to small orders and follow and use a whole day’s volume to match the VMAP . you participate in the market but can not by much for high percentage will distort the VMAP.

If the price of stock rises throughout the day and by the end of the day the price of the stock is at the highest, a trader will wait for the next day make sure that he does a buy at a price lower or closer to the VWAP. i.e. Day 1: Stock price at 9am = \$10 Stock price at 4pm = \$12 VWAP = ~\$11 Trader will not want to purchase the stock at the end of the day at pay \$12, which is above the day’s VWAP of ~\$11. He will wait a day (this is what they mean when they say the VWAP is subject to gaming). So he waits until the next day where the stock price is \$12 Day 2: stock price at 9am = \$12, trader buys at \$12. stock price at 4pm = \$14 VWAP = ~\$13 Now the trader executed his trade below VWAP and looks like a champ. Not sure if this answers your question, but that’s how I understand it.

Did some digging and feel a little clearer…let me know if you think I’m off base. VWAP is a simple logical participation strat. Trader uses some model to forecast what the day’s VWAP will be and buys bits and pieces throughout the day to minimize market impacts with the hopes that his VWAP is lower than the total day’s VWAP. Urgency is low so no need to rush to buy at the open, spreads are low and you are a small part of the day’s volume, so you aren’t moving the market - minimizing market impacts, blending in. The trader is comped to the rest of the market. Implementation shortfall is a more complex logical participation strategy that looks to minimize TOTAL execution costs. Focus on delay cost and oppurtunity cost means more early-day trading (consistent with the high urgency). Trader is comped to the benchmark price at the time of the decision…not so much the rest of the market.

sounds like you got it. Just remember this: Implementation Shortfall includes all costs, explicit and 3 implicit (delay costs, MTOC, realized GnL) and cannot be gamed. VWAP only includes explicit costs and 1 implicit cost (realized GnL) and CAN be gamed.