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.
Use A TWAP strategy is often used to minimize a large order's impact on the market and result in price improvement. 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.
Formula TWAP is calculated using the following formula:
P T W A P = ∑ j P j ⋅ T j ∑ j T j {\displaystyle P_{\mathrm {TWAP} }={\frac {\sum _{j}{P_{j}\cdot T_{j}}}{\sum _{j}{T_{j}}}}\,}
where:
P T W A P {\displaystyle P_{\mathrm {TWAP} }} is Time Weighted Average Price;
P j {\displaystyle P_{j}} is the price of security at a time of measurement j {\displaystyle j} ;
T j {\displaystyle T_{j}} is change of time since previous price measurement j {\displaystyle j} ;
j {\displaystyle j} is each individual measurement that takes place over the defined period of time. Increased period of measurements ∑ j T j {\displaystyle \sum _{j}{T_{j}}} results in a less up-to-date price.
See also Volume-weighted average price Slippage (finance)
References