Algos 101: TWAP

With automated trading and algorithmic execution strategies accounting for 85% of equities trading, its no secret algos have become a useful implementation tools in Futures markets. Algos have a lot going on from TWAP vs brISK, to implementation and slippage cost; and that’s just the tip of the ICEBERG. So what better way to educate than to create an Algo Execution Educational 101 Series….Algos 101 for short. In this series, we’ll be explaining how the different types of algorithms work and execution issues that they aim to solve.

First up: the TWAP Algo.


Algo Name: TWAP
The TWAP algo stands for Time Weighted Average Price, and as can be gleaned from the name, aims to give you an average price over time. The TWAP is a participation based algo that accomplishes the average pricing by executing evenly sliced fractions of the total amount to be traded across evenly divided time intervals between start and end time.

Take an investor for example looking to execute 100 contracts using a TWAP algo – a TWAP algo can split that order and execute 1 contract per minute for the next 100 minutes. Or 5 contracts per minute for the next 20 minutes. Or 10 per minute for the next 10 minutes. Or 25 per second for the next 4 seconds. You get the idea.

Why would you want the average price over time? Consider our investor/trader who has 1,000 contracts to buy for the day, and has no strong inclination on which direction the market is going to move in the short–term. If the trader executes the 1,000 contracts on the open, they risk the market moving lower throughout the trading day and having bought towards the high end of the day’s range. Conversely, waiting and buying on the close puts our trader at risk of the market moving steadily higher throughout the day and ending up again buying in the high end of the day’s range.

But, using the TWAP algo set to split those 1000 contracts evenly over the course of the day removes the risk of being wrong on the open or close (or anywhere in between). No matter which way the market moves, our investor removes the risk of really being wrong on the execution.

Another huge benefit of TWAP is that our investor removes the risk of the 1,000 contracts causing ‘market impact’ when placed all at once, driving the market higher based solely on the presence of the investor’s lone order. Spreading the order out evenly doesn’t “spook” traders on the other side from increasing their offers upon seeing a large buy order come in. Just look at the graphic below and ask yourself which order is likely to push the market more.


How does RCM-X handle the TWAP? The fundamental premise is mostly the same, with the RCM-X, TWAP attempts to execute evenly across a user defined time based interval. But, there’s a few advancements, as with all the algos in our suite, the RCM-X TWAP utilizes short-term signals to optimize execution performance. How? Instead of always crossing the spread and executing precisely at a defined point in time, the TWAP algo may remain passive or aggress early when signals warrant it in order to improve execution performance. In addition, the RCM-X algo utilizes anti-gaming features in order to minimize detection in the market

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