VWAP

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VWAP is a trading acronym for Volume-Weighted Average Price, the ratio of the value traded to total volume traded over a particular time horizon (usually one day). It is a measure of the average price a stock traded at over the trading horizon.

VWAP is often used as a trading benchmark by investors who aim to be as passive as possible in their execution. Many pension funds, and some mutual funds, fall into this category. The aim of using a VWAP trading target is to ensure that the trader executing the order does so in-line with volume on the market. It is sometimes argued that such execution reduces transaction costs by minimizing market impact (the adverse effect of a trader's activities on the price of a security).

VWAP can be measured between any two points in time. For instance, it is completely relevant to speak of VWAP over some specified part of a day, rather than day-VWAP. VWAP orders issued after the start of trading would typically be benchmarked to VWAP from the start of the order to the end of the trading day.

[edit] Formula

The VWAP price is calculated using the following formula:

where:

P_VWAP = Volume Weighted Average Price

P_j = price of trade j

Q_j = quantity of trade j

j = each individual trade that takes place over the defined period of time, excluding cross trades and basket cross trades.