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Mark Buchanan
+ 44 207 888 0908
Ma rk.k.bucha na

Liesbeth Baudewyn
+ 44 207 888 7988

Trading Strategy

Xiang Lin
+ 44 207 888 0974

Getting to Grips with VWAP

Market Commentary

2 October 2013

Key Points

The VWAP benchmark is an industry

standard approach to measuring trader

Performance versus VWAP is highly

dependent on a countrys market

Those markets with the most stable

profiles and the lowest spread costs tend
to have least slippage.

More aggressive trades tend to cost more

relative to VWAP.

Dark pools exposure improves execution

performance versus VWAP.

VWAP is highly sensitive to the closing

print, as well as the venues and trade
types included in its calculation.

How We Crunch the Numbers

The transaction cost data used in this report is
extracted from ExPRT, Credit Suisses
proprietary TCA tool (see ExPRT for Dummies
for further details). It represents trading by a
broad range of institutional investors via the
single stock, portfolio trading and AES desks
over the period from Jan 1st Aug 30th 2013.
Our analysis is based on VWAP strategy tickets
only, as these tactics explicitly target the VWAP
benchmark. Limit orders, orders which are not
fully executed, amended orders and trades
impacted by extreme price moves have been

Getting to Grips with the VWAP Benchmark

Love it or Loathe it, Its Not About to Disappear from TCA
The VWAP benchmark which measures the difference between the average
execution price and the market wide volume weighted average price is well
established as an industry standard approach to measuring trader performance.
While there are various arguments against the use of VWAP as a measure of
execution quality (see Why Be Average? for further details), it is not likely to
disappear from transaction cost analysis (TCA) reports including Credit
Suisses ExPRT any time soon.
To help traders better understand their performance versus VWAP, this report
looks at the relative cost of trading different European countries based on data
from our ExPRT client execution database (see side box for further details). We
also investigate how performance versus VWAP varies with respect to intra-day
volume profile stability, spread costs, participation rate and exposure to dark
pools. Finally, we consider whether the closing print has much impact on full
day VWAP, and whether the absence of an industry-standard consolidated tape
matters in the context of measuring performance versus VWAP.

One Region, Mixture of Microstructures

Market Microstructure is Key Driver of VWAP Performance
Some countries in Europe have very similar microstructures, while others vary
significantly with respect to turnover, bid-ask spreads, top-of-book liquidity,
trade frequency, volume profile stability and fragmentation (see Exhibit 1 and
Algorithmic Trading in Europe Spreads its Wings for further details).
Unsurprisingly, our analysis suggests that each countrys market microstructure
is a key driver of execution performance versus VWAP. We find that those
markets with the most stable intra-day volume profiles and lowest spread costs
tend to have the least slippage and the lowest variation in performance. We also
find that more aggressive trades tend to cost more versus VWAP and that
exposure to dark pools improves execution performance. Is there much
difference between the VWAP with and without the closing auction, or using
primary market only versus consolidated data? Our analysis suggests that there

Exhibit 1: Bid-Ask Spreads vs. Top of Book Liquidity


Source: Credit Suisse Trading Strategy, January 1st August 30th, 2013


VWAP Slippage Varies by Country

Top Countries Have Similar Costs, Others More Variable
Those markets with the lowest slippage versus VWAP are separated by
fractions of basis points in terms of their performance (see Exhibit 2). The
standard deviation of performance versus VWAP for these markets is also
remarkably similar.
Exhibit 2: VWAP Slippage & Variation in Performance vs. VWAP by Country

Worse performance


Source: Credit Suisse Trading Strategy, January 1st August 30th, 2013

However, as you move beyond the top markets to consider the smaller and less
developed markets in Europe, both the average slippage and standard deviation
of performance versus VWAP increase substantially. For example, average
slippage in South Africa is 3.3x that of the UK, while Turkey is even more
expensive and variable.

Profile Stability Matters

Countries with Stable Volume Profiles Track VWAP Best
VWAP tactics slice orders according to a stocks historical intra-day volume
profile. The more stable the historical profile, the more likely that the VWAP
tactic will slice orders in line with the stocks actual volume profile on the day of
the trade. It is therefore not surprising to find that those countries with the most
stable profiles also tend to have the lowest slippage versus VWAP (see Exhibit
Exhibit 3: VWAP Slippage vs. Volume Profile Instability by Country

Worse performance
Source: Credit Suisse Trading Strategy, January 1st August 30th, 2013

How We Calculate Spread Cost
For each individual child level fill, we compare the
execution price with the prevailing near touch quote
on the primary market. Spread cost is the weighted
average of the difference between these two
numbers expressed in basis points.

How Important Are Spread Costs?

Countries with Low Spread Costs Track VWAP Best
Spread cost is another key determinant of performance versus VWAP (see side
box). In order to maintain scheduling versus the stocks historical intra-day
volume profile, the trader is generally required to pay the spread on some
portion of the order. The wider the bid-ask spread, the more costly this could be
relative to VWAP. This pattern is borne out by the data (see Exhibit 4), with
higher spread costs corresponding with higher deviation versus VWAP by

Exhibit 4: VWAP Slippage vs. Spread Cost by Country

Worse performance
Source: Credit Suisse Trading Strategy, January 1st August 30th, 2013

Exhibit 5: Distribution of VWAP Slippage vs.

Spread Cost

Why does Turkey have such high spread costs? This is partly because the tick
size structure in Turkey forces bid-ask spreads to be wide (see Exhibit 1 and
Global Equity Markets Handbook - Feb 2013 for further details). The resulting
high depth of book in Turkey means that a significant amount of volume can be
taken from the near-touch without ever reaching the traders VWAP order. The
trader is therefore often forced to pay the spread more often than he/she would
like to relative to other markets.
Poland is another interesting case. Although its spread costs are comparable to
those of the lowest cost markets, the fact that it has one of the least stable
intra-day volume profiles makes it challenging to match VWAP (see Exhibit 3).

Spread Costs Can Drive Extreme Performance

Source: Credit Suisse Trading Strategy, January 1st August 30th,

Exhibit 6: VWAP Slippage vs. Volatility

Global Financial Crisis

J.P. Morgan
acquires Bear

We also find that spread costs are an important driver of variability in

performance versus VWAP. Where spread costs are low (i.e. less than 10bps),
the distribution of performance versus VWAP is fairly tightly distributed around
the average (see Exhibit 5). In contrast, trades with high spread costs are more
negatively skewed versus VWAP and exhibit much higher variability of

Matching VWAP is Tougher during Periods of High Volatility

Greece Debt Crisis

Euro Crisis

Since bid-ask spreads and volatility are highly correlated (see Europe Chartbook
(Aug-13) for further details) it is not surprising to find that matching the VWAP
benchmark is tougher during periods of high volatility (see Exhibit 6).
Anecdotally, it may also be the case that traders need to pay the spread more
often in high volatility environments and that volume profiles are less stable (see
Executing in Earnings is Extra Expensive for further details).

Source: Credit Suisse Trading Strategy, January 2007 August 2013


More Aggressive Trading Costs More

Exhibit 7: VWAP Slippage vs. Participation Rate

High Aggression Rates Have Higher Deviations vs. VWAP

More aggressive trading typically incurs higher spread costs (see A New EDGE in
Impact Cost for further details). It is therefore not surprising to find that, on
average, trades with higher participation rates have higher slippage versus VWAP
(see Exhibit 7). To ensure an apples-to-apples comparison between the
participation rate buckets, we have normalised our data set with respect to trade
size and bid-ask spreads.

Exposure to Dark Pools Makes a Difference

Trades with Higher Exposure to Dark Pools Outperform

Source: Credit Suisse Trading Strategy, January 1st August 30th,


There are three main reasons why exposure to dark pools is likely to reduce
slippage versus VWAP. First, dark pools help traders reduce signalling costs. In
Measuring Dark Pools' Impact and The Cost of Primary Market Only Execution
we found that posting even small orders on lit markets can cause prices to move
against the trader (see Exhibit 8). Second, by facilitating execution within the bidask spread dark pools help traders reduce their spread costs. Thirdly, dark pool
prints allow VWAP algos to slice orders into even smaller waves and therefore
better match a stocks actual volume profile.

Exhibit 8: Signalling Costs in FTSE 100 and Euro

STOXX 50 Names*

Approach to Analysis
To test this theory, we analysed the performance of Credit Suisse VWAP
tactics during 2013 and split the sample into those exposed to the dark (i.e.
Credit Suisse Crossfinder and MTF dark pools) and those not. We paired the
samples so they are similar with respect to trade difficulty, as measured by
%ADV, bid-ask spread and participation rate. We have considered only market
orders that were fully filled and trades impacted by extreme price moves have
been excluded.

Bid Imbalance
Ask Imbalance

On average trades exposed to the dark outperformed on a relative basis versus
VWAP across every trade size bucket (see Exhibit 9). Overall, the relative
outperformance was 0.94bps and the difference in performance was
statistically significant at the 5% level. We also found that orders exposed to
the dark had slightly lower variability of performance versus VWAP. As the other
meaningful factors were controlled for in the construction of the two samples,
there is evidence to suggest a link between exposure to the dark and execution

Source: Credit Suisse Trading Strategy, November 22nd

December 17th, 2012
*Note: Our approach is to track the movement of the mid-point of
the bid-ask spread from the point where the bid-size is greater than
5x the ask size (and vice versa) for 2 consecutive ticks, but the
bid/ask size is no more than the average primary market trade size
for the stock.

Exhibit 9: VWAP Slippage by Dark Pool Exposure




Worse performance
Source: Credit Suisse AES Analysis, January 1st August 30th, 2013


To Include the Closing Print, or Not

VWAP Benchmark is Highly Sensitive to the Closing Print
In a previous analysis, we found that stocks in Europe tend to have the most
stable closing volume profiles (see Exhibit 10 and EDGE Update:**NEW MOC
Pre-Trade in EDGE** for further details). As a result, VWAP tickets in Europe
typically include the closing print, whereas they are often limited to continuous
trading in the Americas and Asia.
Exhibit 10: Closing Volume Profile Instability by Country

Source: Credit Suisse Trading Strategy, August 21st, 2013

Exhibit 11: Distribution of Full Day VWAP vs. VWAP

ex. Closing Auction

15.4% of prices are

lower by >0.5bps

17.4% of prices are higher

by >0.5bps

Since the closing print accounts for around 15% of average daily volume in
Europe, it could reasonably be expected to have a significant influence on the
market wide VWAP. Our analysis, which compares the VWAP price during
continuous trading with the full day VWAP, suggests that is indeed the case
(see Exhibit 11).

VWAP Analysis without a Consolidated Tape

VWAP Benchmark Highly Dependent on Venue Selection
The lack of an industry standard consolidated tape is frequently cited as one of
the most important issues facing traders in Europe. As evidenced by the MiFID
II discussions, all parties agree on the need for affordable, consolidated posttrade data. However, their views differ on how that might best be achieved (see
MiFID II: Hail CESR! for further details).

Source: Credit Suisse Trading Strategy, August 1st September 27th,


Exhibit 12: Distribution of Primary Market VWAP

Slippage vs. Consolidated VWAP Slippage

19.5% of notional has

slippage >2bps worse

17.4% of notional has

slippage >2bps better

Source: Credit Suisse Trading Strategy, January 1st August 30th, 2013

In the absence of an agreed-upon standard, data vendors and TCA providers

have devised their own proprietary consolidated tapes. Due to on-going
concerns about the underlying content of over-the-counter (OTC) prints, most
TCA products tend to focus on primary market and multilateral trading facility
(MTF) prints only. However, different providers VWAP prices may still vary due
to venue selection or the exclusion of certain trade types.
In a TCA context, does it make a big difference what trades or venues get used
to compute the VWAP benchmark? Our analysis suggests that it may. By
comparing the VWAP price computed using primary market prints only to the
price derived when MTF and primary trades are taken together (sourced from
the ExPRT database), we find that there is a high degree of variation between
the two (see Exhibit 12). With MTFs accounting for over 40% of FTSE 100
turnover and over 35% of Euro STOXX 50 turnover this is perhaps not a
surprising result. However, it does demonstrate the importance of using the
most appropriate measure when evaluating VWAP performance.

Credit Suisse
Trading Strategy
Phil Mackintosh
Victor Lin
Ana Avramovic
Stephen Casciano

+1 212 325 5263

+1 212 325 5281
+1 212 325 2438
+1 212 325 0776

Mark Buchanan
Colin Goldin
Liesbeth Baudewyn

+44 20 7888 0908

+44 20 7888 9637
+44 20 7888 7988

Karan Karia

+852 2101 6322

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