TWAP Trading II The art of TWAP Trading

What is TWAP Trading ? 1. TWAP Meaning

• TWAP (Time-Weighted Average Price) is a trading strategy used by big-shot traders to execute large orders without causing a price frenzy. Basically, it involves breaking down a big order into smaller parts and trading them at regular intervals over a specific time period. This helps to achieve an average price and minimize the impact on the market.

2.TWAP Formula

• In the finance world, one of the important metrics related to this is the Time Weighted Average Price (TWAP). It’s basically the total value of a security traded during a specific time period divided by the time it took to trade that security. It’s a common method to figure out the average price at which a stock is traded, giving a better reflection of the market conditions.

3.Example :

• Let’s say you want to buy a huge bunch of apples at the local market, but you don’t want the price to skyrocket. Instead of buying them all at once, you could buy them in smaller increments, like 100 apples per hour, for example. By doing this, you’ll end up paying an average price for all the apples you buy. This method helps to reduce the impact on the market by splitting up a large trade into smaller orders and executing them gradually.

Now, let’s take a look at some strategies for TWAP:

TWAP Strategies 1.Uniform Order Splitting

• This is the simplest approach where you divide your total order into multiple smaller ones and trade them at fixed intervals. For instance, if you want to purchase 100 shares in a day, you could buy 10 shares every hour.

2.Randomized Intervals

• To avoid falling into a predictable trading pattern, you can choose random intervals instead of fixed ones. For example, instead of trading every hour, you could trade at intervals of 45 minutes, one hour, and fifteen minutes, and so on.

3.Volume-Based Splitting

• Adjust your trade size based on the market volume. If the market is buzzing with activity, match your trades with the overall market turnover. If it’s a slow day, trade less to avoid attracting attention with a large number of shares.

4.Price-Triggered Execution

• Execute trades based on specific price levels. For instance, buy more shares when prices are low and hold off on buying when prices are high.

5.Hybrid Strategies

• Combine the above strategies as needed, depending on your trading goals and customer requirements.

Here are some examples to illustrate these strategies: Uniform Order Splitting

• Imagine filling a big tank with water using buckets. Every hour, you pour in water using the same-sized bucket. Similarly, you fix the quantity of shares you want to purchase and buy them at regular predefined intervals.

Randomized Intervals

• Instead of adding water to the tank every hour, mix it up by adding water after 30 minutes, then one hour and ten minutes, and so on. This unpredictability is like buying shares randomly to avoid following a predictable pattern.

Volume-Based Splitting

• Use big buckets when it’s raining (when the market is active) and small buckets when it’s sunny (when the market is quiet). This means buying more shares during high market activity and fewer shares during low activity.

Price-Triggered Execution

• Just like collecting rainwater only when it’s lightly drizzling, commit more capital when share prices are low and hold off when prices are high.

Hybrid Strategies

• Combine these methods, like using a large bucket and switching to a small bucket during certain times of the year when the weather is favorable.

Now let’s talk about the benefits of TWAP: Better Prices:

• TWAP helps you get a better average price compared to buying a large batch all at once, which can drive up the price.

Less Attention:

• With TWAP, your trades won’t attract too much attention, which helps stabilize prices and prevent any unwanted fluctuations.

Flexibility:

• You have the freedom to adjust your strategy according to market conditions. For instance, you can increase the quantity for great deals.

Limitations of TWAP Time-Consuming:

• Similar to filling a pool with a garden hose, executing all the trades with TWAP takes a considerable amount of time.

Unexpected Changes:

• If there are significant fluctuations in market prices, you might end up with a less favorable price than anticipated.

Not Stealthy Enough:

• Other traders might notice your TWAP trades, which could potentially distort prices.

Simple Strategy:

• TWAP is a straightforward approach that doesn’t factor in price changes or market volume.

• To sum it up, TWAP allows you to make multiple trades without causing too much disturbance in the market. Its goal is to obtain a good average price for a large number of stocks or futures contracts while maintaining a lower level of visibility.

TWAP Vs VWAP

• TWAP averages stock prices at set time intervals, aiming to minimize market impact. It doesn’t consider volume of trading.

• VWAP, on the other hand, factors in both price and traded volume over time. It provides a more accurate reflection of average price based on market sentiment and volume of Trade.

• A BAYC NFT was mistakenly sold for 200 USDC