why VWAP can't be used in urgent trade and criteria for best execution

CFA Level III
#1

for a liquid stock, say google, why VWAP can’t be used in urgent trade(we should use IS), for a large order, say 1mil share of apple buy, why can’t use VWAP again,

does limit order always has higher transaction cost than market order? how can I judge is a best execution, say I buy 200 share of apple but incured transaction cost 1000 USD, can it be a best execution?

#2

VWAP - tries to minimize the cost by mimicking the volume pattern of the stock…typically during the day

IS - tries to minimize the delay cost by trading early…alos if you are sitting on an information which others dont know…to avoid leakage of info & trying to capture maximum by trading early thru market order

#3

thanks, how about best execution question

#4

for best execution book says:

  • It cannot be accessed independently. I mean you have to take into account all the trades done
  • Can not be know with certainity - ex ante. It should be analyzed ex post
  • Its ongoing & requires diligence

“how can I judge is a best execution, say I buy 200 share of apple but incured transaction cost 1000 USD, can it be a best execution?”

It can be judged indepently. Take into account the market conditions as well.

#5

why VWAP can not be used in urgent trade?

#6

VWAP spreads everything over a day. from morning till market closes.

if you are urgent, would you wait until mark almost closes to execute your last trade?

no, you want execute your trade as early as possible.

#7

you are talking how to game by VWAP.

normally in trading department, VWAP is like this: we slice 100 mil sell of BAC into different small slice lot, then submit through crossing network, and this can be done very early morning,

so can i say TWAP is ok for urgent trade?

for large order not urgent, do we prefer VWAP or IS?

#8

large order not urgent = crossing

VWAP used for small orders that are not urgent, or so i think

anyone?

#9

^confirmed

#10

How about when to use a Broker vs ECN… both are good for large illiquid trades, both provide anonymity… I guess it comes down to cost?

#11

In ECNs, commissions are low

#12

I would say ECN’s provide more anonymity than Brokers do. If trader was very sensitive to being left anonymous, I’d say go with ECN - especially for very large orders with low liquidity and time is not a factor. If time starts to outweight anonymity then use Broker.

#13

Isn’t there a chance of missing the trade execution completed in ECN’s and incurring a large Missed Trade Opportunity Cost, while the chances for this in Brokered market are pretty less. Probably it comes down to the degree of anonymity?

#14

TWAP is useful when the volumes are low and irregular , spreading out the trade by time interval would be more likely to catch a small volume appearing suddenly. You couldn’t depend on VWAP , simply because it is too irregular for a volume algorithm to work reliably , also the stock is not liquid enough to use IS

#15

Crossing network : for low urgent order. Anonymity. But no price discovery. Broker : for high urgency and illiquid market. Some anonymity. Price disciovery?

#16

does this look right?

large-> wide spread-> urgent = broker

large-> narrow spread-> not urgent = crossing

small-> wide spread-> urgent = Im SF or Broker

small-> narrow spread->urgent = Im SF

small->narrow spread->not urgent = VWAP

#17

mcap11, no need to decode your post if it’s in separate lines.:slight_smile:

Ditto to all. One question:

Why can’t use Implementation Shortfall for “small->narrow spread->not urgent” orders as well?

#18

.

#19

Because IS trades earlier in the day and tries to minimize the DC and MTOC, while VWAP you spread the order uniformley throughtout the day.

#20

Yes, I agree with you. Isn’t minimizing the DC and MTOC good? IS sounds superior.