A beginner's guide to TWAP (time-weighted average price)

Large investors rarely buy everything in one go. One simple method they use is TWAP, short for time-weighted average price. This page explains what TWAP means, how a TWAP order works and how it compares with VWAP.

Quick answer

TWAP, or time-weighted average price, is the average price of a security over a set period, calculated by giving equal weight to each time interval. A TWAP execution strategy splits a large order into equal-sized pieces and places them at regular intervals over that period. The aim is to reduce price impact and get an average price close to the period's TWAP.

Key takeaways

• It is the average price over time with equal weight per interval.
• The order type splits a trade into equal parts at regular times.
• It reduces the price impact of large orders.
• It ignores volume, unlike VWAP.
• It can be predictable, which fast traders may exploit.

What is TWAP?

To work out the time-weighted average price, you take prices at regular intervals, such as every five minutes, and find their simple average. Each interval counts equally, whether the market was busy or quiet.

For example, if a share's prices at five equal intervals are Rs 100, Rs 101, Rs 102, Rs 101 and Rs 100, the TWAP is Rs 504 divided by 5, or Rs 100.80.

How does a TWAP order work?

Suppose a fund wants to buy 60,000 shares over three hours. The strategy might split this into 36 pieces of about 1,667 shares, placing one every five minutes. Because each order is small, it does not push the price much.

Some such programs add small random changes to timing and size so that the pattern is less obvious to other traders. Brokers and trading platforms often offer it as an algorithmic order type.

When is TWAP used?

It is useful when a trader wants a simple, steady approach and does not want to rely on volume forecasts. It can suit shares with fairly even trading through the day, or periods when volume data is not reliable.

It is also used as a benchmark. A trader can compare their average price against the period's TWAP to judge how well an order was executed.

What are the limits?

Because it ignores volume, this order may trade too much during quiet times, when liquidity is low and impact is higher, and too little during busy times. A fixed schedule can also be spotted by fast traders, who may try to trade ahead of the next piece.

If the price trends strongly in one direction during the period, the order will still keep buying or selling at the same pace, which may not be ideal.

The key point to remember

TWAP spreads a large order evenly over time to limit price impact. It is simple and widely used, but it does not adapt to volume or trends, so traders often combine it with other methods.

Frequently Asked Questions