TWAP Trading II The art of TWAP Trading

What is TWAP Trading ?

1. TWAP Meaning

• The TWAP (Time-Weighted Average Price) strategy is a TWAP trading strategy used by big-shot traders to execute large orders without causing a price frenzy. Basically, it involves breaking down a big order into smaller parts and TWAP trading them at regular intervals over a specific time period. This helps to achieve an average price and minimize the impact on the market.

2.TWAP Formula

• In the finance world, one of the important metrics related to this is the Time Weighted Average Price (TWAP). It’s basically the total value of a security traded during a specific time period divided by the time it took to trade that security. It’s a common method to figure out the average price at which a stock is traded, giving a better reflection of the market conditions.

3.Example :

• Let’s say you want to buy a huge bunch of apples at the local market, but you don’t want the price to skyrocket. Instead of buying them all at once, you could buy them in smaller increments, like 100 apples per hour, for example. By doing this, you’ll end up paying an average price for all the apples you buy. This method helps to reduce the impact on the market by splitting up a large trade into smaller orders and executing them gradually.

Best Platforms for TWAP Trading

• Unfortunately, there is no single platform that is exclusively designed for TWAP trading; however, there are several most popular trading platforms, which, indeed, do offer TWAP as one of the algorithmic trading options. Here’s a breakdown of 4 well-regarded platforms:Here’s a breakdown of 4 well-regarded platforms:

1. Interactive Brokers (IB)

• A true giant in the global market of online brokerage, it now provides a professional Trader Workstation. TWAP orders along with other algorithmic strategies are supported from this platform. It suits the pro traders with features like order types, and others designed for researching the market. Again, however, it should be noted that IBKR can take a little while to get used to, especially for new users.

2. TD Ameritrade

• The thinkorswim platform developed by the TD Ameritrade is also accompanied with support for the TWAP orders and the easy interface. Layered with depth, Thinkorswim is fairly easy to use and yet great for experienced traders which places it as a top choice. To get acquainted with algo trading they offer educational tools that can be useful.
• TD Ameritrade inc. is now at Charles Schwab.

3. Lightspeed

• This website is a bit more versatile for professional traders and hedge fund companies than for a regular trader. The company uses state-of-art algorithmic order types such as TWAP and also delivers clients superior execution. Their services are however more costly than other platforms and this is usually true for most traditional brokers.

4. TradeStation

• Also for professionals it is more complex, offering not only back-testing of a strategy, but also TWAP services. This means that you can trade with a TWAP strategy that you have developed without putting real money on the line. Like Lightspeed, it is possible that Trade Station’s services are accompanied by higher fees.

TWAP Vs VWAP

• TWAP algorithm invests/buys a fixed number of shares at fixed time intervals throughout the period of your choice. It focuses more on the delivery of your order within the required time, despite the fact that the quantity of money paid may differ with the market price.
• TWAP averages stock prices at set time intervals, aiming to minimize market impact. It doesn’t consider volume of trading.
• VWAP, on the other hand, factors in both price and traded volume over time. It provides a more accurate reflection of average price based on market sentiment and volume of Trade.
• This strategy will help you in getting an average price which you will be able to identify from the market activities. The VWAP formula calculates the average price that can be considered as the arithmetic mean of trades’ prices during a certain time period, called the volume-weighted average price Σ(Price x Volume) / (Sum of Volume).
• Key Difference: The major difference between the TWAP and VWAP is that the former emphasizes on the time taken to complete the order, while the latter concentrates on attaining the average price considering to volume.

Now, let’s take a look at some strategies for TWAP:

TWAP Strategy

1. Uniform Order Splitting

• This is the simplest approach where you divide your total order into multiple smaller ones and trade them at fixed intervals. For instance, if you want to purchase 100 shares in a day, you could buy 10 shares every hour.

2. Randomized Intervals

• To avoid falling into a predictable trading pattern, you can choose random intervals instead of fixed ones. For example, instead of trading every hour, you could trade at intervals of 45 minutes, one hour, and fifteen minutes, and so on.

3. Volume-Based Splitting

• Adjust your trade size based on the market volume. If the market is buzzing with activity, match your trades with the overall market turnover. If it’s a slow day, trade less to avoid attracting attention with a large number of shares.

4. Price-Triggered Execution

• Execute trades based on specific price levels. For instance, buy more shares when prices are low and hold off on buying when prices are high.

5. Hybrid Strategies

• Combine the above strategies as needed, depending on your trading goals and customer requirements.

TWAP trading tips:

• Target Illiquidity: TWAP strategy is useful for less active securities in which an organization’s large order may cause a significant shift in price.

• Divide and Conquer: It is noble to remember that it is unlawful to manipulate the market hence it is wise to partition your large order in to get portioned.

• Randomize It: They order the products at specific time intervals which should not be the case. Space them to ensure that people do not read your strategy easily.

• Monitor Markets: A TWAP is an effective trading strategy but always monitor the prices and change the parameters if the prices fluctuate heavily.

• Consider Costs: Like other categories of trading, TWAP trading costs have the execution fees since there are several orders entered to the market. If you’re planning a defence then incorporate this into your plan.

Is TWAP a lagging Indicator?

Yes, Twap is a lagging indicator since it depends on historical data.

Can individual investors implement the TWAP trading strategy, or is it mainly for institutional traders?

Individual can implement TWAP Strategy, however it is crucial for them to understand the Strategy and market condition

Is TWAP better than VWAP?

Both are widely used by the traders, however VWAP is more reliable and less predictable. Hence, VWAP is the preferred in above two.