Community

QOTW (Nov 29th 2016): What is the relationship between VWAP performance and IS cost in APAC?

What is the relationship between VWAP performance and IS cost in APAC?

 

Chart 1: VWAP Cost distribution from ITG’s Peer Group Universe 

 

Chart 2:  Trading Cost versus VWAP performance

 

Chart 3:  Risk versus VWAP performance

  • VWAP and Volume Participation execution strategies are common in APAC. There is an articulated concern that a focus on VWAP performance may conflict with the bottom line goal of reducing implementation shortfall costs.
  • Chart 1 illustrates that a majority of executions for Large and Small cap stocks have VWAP performance in the -50 to +50 bps range. About 50% of total volume deviates from VWAP by 10 bps or less.
  • Charts 2 and 3 show average Implementation Shortfall cost and standard deviation of IS cost for Small and Large Cap trades in VWAP performance buckets.  For instance, Large Cap orders with VWAP performance between 0 and 5 bps have an average IS cost of -20bps.
  • Both charts 2 and 3 indicate that Implementation Shortfall Cost and Standard Deviation of cost are minimized when performance against VWAP is minimized.  IS cost grows as the deviation from VWAP increases (on both the positive and negative side of the distribution).  

The data was pulled from ITG’s Peer Group Database for 2013 – 2016 APAC trades. Implementation shortfall cost is measured relative to the desk release time, and it is expressed in basis points. VWAP performance is measured relative to the VWAP for the order’s horizon between release to desk time and the time of last execution. VWAP performance is expressed in basis points. VWAP performance was bucketed into groups with 5bps interval between each group. Percent of Volume, IS Cost and Risk metrics were calculated at the bucket level.

Refer to ITG Peer Analytics for information available on ITG Peer Group Analytics.

You may have a question or want to share your view with others in our community, please join the Incubator community and submit your entry or send us an email

 

Comments

You must be logged in to post a comment.

Please sign in or sign up.