Time-weighted average price

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:

$P_{\mathrm {TWAP} }={\frac {\sum _{j}{P_{j}\cdot T_{j}}}{\sum _{j}{T_{j}}}}\,$

where:

$P_{\mathrm {TWAP} }$ is Time Weighted Average Price;

$P_{j}$ is the price of security at a time of measurement$j$;

$T_{j}$ is change of time since previous price measurement$j$;

$j$ 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
• Slippage (finance)