Volume-weighted average price
In finance, volume-weighted average price (VWAP) is the ratio of the value traded to total volume traded over a particular time horizon (usually one day). It is a measure of the average price a stock traded at over the trading horizon.
VWAP is often used as a trading benchmark by investors who aim to be as passive as possible in their execution. Many pension funds, and some mutual funds, fall into this category. The aim of using a VWAP trading target is to ensure that the trader executing the order does so in-line with volume on the market.
VWAP can be measured between any two points in time but is displayed as the one corresponding to elapsed time during the trading day by the information provider.
VWAP is often used in algorithmic trading. Indeed, a broker may guarantee execution of an order at the VWAP and have a computer program enter the orders into the market in order to earn the trader’s commission and create P&L. This is called a guaranteed VWAP execution. The broker can also trade in a best effort way and answer to the client the realized price. This is called a VWAP target execution; it incurs more dispersion in the answered price compared to the VWAP price for the client but a lower received/paid commission. Trading algorithms that use VWAP as a target belong to a class of algorithms known as volume participation algorithms.
(a) Section 6.3(a) of the Equity Definitions shall be amended by deleting the words “at any time during the one hour period that ends at the relevant Valuation Time, Latest Exercise Time, Knock-in Valuation Time or Knock-out Valuation Time, as the case may be” and replacing them with the words “at any time during the regular trading session on the Exchange, without regard to after hours or any other trading outside of the regular trading session hours” and by amending and restating clause (a)(iii) thereof in its entirety to read as follows: “(iii) an Early Closure that the Calculation Agent determines is material”.
(c) If the final Valuation Date is a Disrupted Day, the Calculation Agent may determine that such day is a Disrupted Day only in part, in which case the Calculation Agent shall designate the Valuation Date determined pursuant to Section 6.6(a) for the remaining portion and the Calculation Agent shall make adjustments to the Number of Shares for which the Disrupted Day shall be the Valuation Date and shall determine the Final Price on the basis of such adjustments. Such adjustments will be based on such factors as the Calculation Agent deems relevant, and may include, without limitation, the duration of any Market Disruption Event and the volume, historical trading patterns and price of the Shares.
The current IRS interpretation is that benchmarking an equity swap to the close is viewed a cross (guilty until proven innocent). As such, one should not use the official close benchmark if trades are held until maturity as it would then invalidate them as true derivatives and recharacterize them as repos. We thus have to legally confirm VWAP over the day as an observable benchmark price for termination. This does not, however, prevent a counterparty from early terminating the swap exposure in methods other than VWAP.