What are the advantages/disadvantages of volume weighted average price measures?
Volume weighted average price (VWAP) measures reflect all activity in the market over a period of time. The advantage is that they are easy to understand, relatively easy to measure and provide a “benchmark” that is, in effect, the performance that should occur if the trading process adds no value. Indeed many brokers have tools today, available to clients, that effectively guarantee to achieve the VWAP as an execution price. In that sense they are comparable to “index returns” as a basis for measuring investment performance. The main difficulties reflect the fact that not all trades are ones in which any given trader could “participate”. As such the VWAP numbers may need to be “adjusted” to provide a fair benchmark. The way in which this adjustment takes place can be confusing and is not always completely transparent. Finally because they represent a “default” result achievable without positive input from traders, traders as a group tend to hold them in poor regard.
Related Questions
- May a broker-dealer accept an order with a performance target (e.g., a volume weighted average price ("VWAP")) that is or could be an impermissible sub-penny price?
- How can I find out the specific 15 days that were selected to determine the $35.3441 average volume weighted price?
- What are the advantages/disadvantages of volume weighted average price measures?
