VWAP (Volume Weighted Average Price)

SUMMARY

VWAP (Volume Weighted Average Price) is a trading benchmark that shows the average price of a security weighted by its trading volume over a specific time period. It provides a way to assess execution quality and trading costs by comparing actual trade prices to the volume-weighted market average.

Understanding VWAP

VWAP is calculated by summing the dollars traded (price multiplied by shares traded) and dividing by the total shares traded during the period:

VWAP = Σ(Price × Volume) / Σ(Volume)

For example, if a stock trades:

100 shares at $10.00 ($ 1,000)
200 shares at $10.05 ($ 2,010)
300 shares at $10.10 ($ 3,030)

The VWAP would be: ( $1,000 +$ 2,010 + $3,030) / (100 + 200 + 300) =$ 10.07

Applications in trading

Execution benchmarking

Traders use VWAP to evaluate execution quality by comparing their achieved prices to the market VWAP. Trading better than VWAP indicates good execution, while consistently trading worse than VWAP may indicate execution problems or market impact costs.

Trading strategies

Algorithmic trading systems often use VWAP-based strategies to:

Minimize market impact by spreading orders across time
Match or beat VWAP as a performance target
Analyze optimal trade timing and sizing

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