Time-Weighted Average Price (TWAP)
Time-Weighted Average Price (TWAP) is a trading benchmark that calculates the average price of a security over a specified time period by dividing the total value of all trades by the total volume traded. TWAP is used by traders to measure the execution quality of a large order, ensuring that it is executed close to the average market price over time. It is commonly used in algorithmic trading to minimize market impact.
Example
A trader uses a TWAP algorithm to execute a large buy order over the course of several hours, ensuring that the trades are spread out and executed at prices close to the market average.
Key points
• A benchmark that calculates the average price of a security over time.
• Used to measure the execution quality of large orders.
• Commonly applied in algorithmic trading to minimize market impact.
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