Mar

6

VWAP, from Bruno Ombreux

March 6, 2007 |

The question is: how to take money out of the pockets of VWAP traders? This has been bothering me for quite some time and I haven't found an easy answer yet.

An old-school broker would slice a big order, perhaps 1/3 at the open, 1/3 at the close, working the remaining third at his discretion over the day. It was possible to make a few bucks intraday by fading him at the open. Since most VWAP programs are slicing according to the U-shape of volume, they are not really changing the daily volume distribution.

So that didn't change. What changed is that the book and tape have become useless. Instead of having big standing limit orders sitting like fish in a barrel, or market orders on the tape, we have hundreds of tiny little orders that are impossible for a human to follow. The Level 2 book, and the tape, are useless now, except in very tiny issues.

So: how to spot the buyers?

Very tough. I have noticed that sometimes when VWAP orders kick in they smooth the price like crazy. One could imagine an intraday smoothness detector to spot big buyers. I have also noticed that some of those programs are operating at fixed-time intervals, such as every half hour. So we should test if price behavior at the half hour is predictive of anything following.

Going beyond VWAP and into algorithmic trading, there is a recent thread with quality posts on Wilmott.

Mark M McNabb adds:

Having read some literature on VWAP I don't see much benefit for most traders, as the inferences in the canned packages seem subject to the same heuristic biases as the investment community's at large. These packages may be good for positioning large orders across markets, but the long and short of it: they are still subject to an outlook and bias. 


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