VWAP Cost Excluding Own Trades

Abstract

VWAP (Volume-Weighted Average Price) Cost is a widely used measure for execution quality. However, many have criticized the VWAP Cost measure. One of the most frequent criticisms is that VWAP Cost includes the trader or institutional investor's own trades in the benchmark price. This paper clarifies related issues by deriving a simple mathematical relation between VWAP Cost including versus excluding own trades. This result enables computation of VWAP Cost excluding own trades without having to explicitly identify the trader's own trades in intraday market data. This is useful in practice because it is extremely difficult, if not impossible, to identify a particular trader's trades in intraday market data (e.g., the NYSE TAQ).

Keywords: VWAP Cost, Trading Cost Measurement, Institutional Trading