Time-weighted average price explained

In finance, time-weighted average price (TWAP) is the average price of a security over a specified time.

TWAP is also sometimes used to describe a TWAP card, that is a strategy that will attempt to execute an order and achieve the TWAP or better. A TWAP strategy underpins more sophisticated ways of buying and selling than simply executing orders en masse: for example, dumping a huge number of shares in one block is likely to affect market perceptions, with an adverse effect on the price.^[1]

Use

A TWAP strategy is often used to minimize a large order's impact on the market and result in price improvement.^[2] High-volume traders use TWAP to execute their orders over a specific time, so they trade to keep the price close to that which reflects the true market price. TWAP orders are a strategy of executing trades evenly over a specified time period. Volume-weighted average price (VWAP) balances execution with volume. Regularly, a VWAP trade will buy or sell 40% of a trade in the first half of the day and then the other 60% in the second half of the day. A TWAP trade would most likely execute an even 50/50 volume in the first and second half of the day.^[3]

Formula

TWAP is calculated using the following formula:

P _{TWAP} = (\sum _{j} {P _{j} ⋅ T _{j})/() } \,

where:

P _{TWAP} is Time Weighted Average Price;P _{j} is the price of security at a time of measurementj ;T _{j} is change of time since previous price measurementj ;j is each individual measurement that takes place over the defined period of time.

Increased period of measurements

\sum _{j{T} _{j}} results in a less up-to-date price.

See also

• Volume-weighted average price

References

1. Web site: 2024-07-20 . Wealth AI . 2024-08-03 . en-GB.
2. Web site: Time-Weighted Average Price . 2021-06-25 . River Financial . River Financial Inc..
3. Web site: Anchored VWAP . 2021-04-18 . StockCharts.com.