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Trading Strategies


Volume Weighted Average Price.

VWAP = sum(P(i) * V(i)) / sum(V(i))

The most basic strategy to target the VWAP. It makes a trading plan or schedule according to the historical trading volume of the instrument, then trades accordingly. No matter how big the total quantity is, it usually makes very little market impact.

Disadvantage: it suffers from a high opportunity cost, especially for smaller orders. For very big orders, the opportunity cost goes down (if we take implementation shortfall strategy as a benchmark).

VWAP can be beated by impacting the market (front run the order) at first, then use VWAP strategy to trade the remaining quantity.


TWAP = sum(P(i) * △T(i)) / sum(△T(i))

Time Weighted Average Price. This is used on small, illiquid stocks where volume analysis makes little sense.

Volume Participation

It sets a volume restriction first, to limit the max participation rate.

One of the use is to keep up with the market, so it's useful for momentum investors to take market opportunities. For example, if there is some big news, the trading quantity on the market goes up very quickly, then the strategy also gets more aggressive accordingly.

Another use is to decrease opportunity cost. For example, the total trading quantity of a stock is 50 million shares. If one wants to trade 5 million shares using this strategy, with volume restriction setting to 10%, then the result is basically the same as trading using VWAP strategy; but if one trades 50,000 shares, then using this strategy can finish the order much quickly, thus the opportunity cost is decreased.

Implementation Shortfall

Implementation shortfall: the difference in return between a theoretical portfolio and the implemented portfolio. Fund managers care more about the 'arrival price' or previous day's closing price, so if the order is traded quickly, its opportunity cost is low, but in this way, the transaction cost goes up due to the impact it gives to the market. On the other side, if it's traded slower with a longer time horizon, the transaction cost goes down, but the opportunity cost goes up. So implementation shortfall strategy calculates the trading efficient frontier, and find the optimal point according to the investor's risk aversion.

Opportunity cost: standard deviation of the trading cost.


Break down large orders into several smaller ones and entered into the market over time. This is used to reduce transaction cost. The performance can be measured by comparing the average purchase price with VWAP over that time period.


The algorithm designed to find hidden orders or icebergs.


It watches all of the market data and finds ways to pick off little pieces here and there in a very intelligent way. It won't put limit orders.


The algorithm designed to discover which markets are most volatile or unstable, or discover activities of other trading strategies. If it discovers other strategies, it can choose to work with or against them to take advantages.

Dark pool is an alternative electronic stock exchange where trading takes place anonymously, with most orders hidden or iceberged. Gamers or "sharks" sniff out large orders by "pinging" small market orders to buy and sell. When several small orders are filled the sharks may have discovered the presence of a large iceberged order. They then front run the order.