VWAP, TWAP and POV Execution

Large traders rarely send one big order. Instead they use execution algorithms that break the order into many small pieces and trade them over time. The three most common schedules are VWAP (volume weighted average price), TWAP (time weighted average price) and POV (percentage of volume, also called participation). Each answers the question "how much should I trade right now?" in a different way.

TWAP: equal slices over time#

A TWAP algorithm divides the order evenly across a time window.

Strengths: simple, predictable, works in markets without reliable volume patterns. Weaknesses: ignores volume, so it trades the same amount in quiet periods as in busy ones, causing more impact when the market is thin. Its regular rhythm can also be detected by other traders.

VWAP: follow the volume curve#

A VWAP algorithm aims to match the volume weighted average price over the period by trading in proportion to expected volume. Because stocks trade more at the open and close, a VWAP schedule trades more then and less at midday.

Strengths: blends in with natural activity, reducing impact; VWAP is a standard benchmark, so beating it is easy to report. Weaknesses: relies on a forecast of the volume curve; it does not react to price, and matching VWAP is not the same as achieving a good price relative to when you decided to trade. See VWAP.

POV: a fixed share of live volume#

A POV algorithm trades a set percentage of actual market volume as it happens, for example 10%. If 50,000 shares trade in an interval, it aims to trade 5,000.

Strengths: adapts to real activity; trades more when liquidity is available and less when it is not; limits how visible the order is. Weaknesses: completion time is uncertain. In a quiet market, the order may not finish by the end of the day. High participation rates increase impact.

Comparing the three#

Beyond the basics#

Real algorithms add many refinements: limit prices beyond which they stop trading, randomised timing to avoid detection, use of passive and hidden orders, dark pool access and responses to short term price signals. Implementation shortfall or arrival price algorithms front load trading to reduce the risk of the price moving away, applying the logic of Optimal Execution and the Almgren-Chriss Model.

Where you will meet them#

• Institutional brokers offer suites of algorithms to fund clients.
• Advanced retail platforms sometimes offer VWAP, TWAP or participation algorithms for stocks and futures.
• Crypto platforms offer TWAP orders for large trades.
• On charts, VWAP appears as an indicator many intraday traders use as a reference for fair value. See VWAP.

Frequently asked questions#

What is the difference between VWAP and TWAP?#

TWAP spreads trades evenly over time. VWAP trades in proportion to expected volume, so it trades more when markets are busier.

What does POV mean in trading?#

Percentage of volume: an algorithm that trades a fixed share of the actual market volume as it occurs.

Which execution algorithm is best?#

It depends on the goal. VWAP suits benchmark tracking, POV suits limiting footprint, TWAP suits simple or low volume situations, and arrival price algorithms suit urgent orders.

Sources#

• Wikipedia, Volume weighted average price
• Wikipedia, Time weighted average price