Our privacy policy describes how Fidessa uses cookies on our website. If you continue using our website, you are consenting to our use of cookies. OK

VWAP is dead – long live FWAP

I have been having all sorts of conversations with people about different ways that the FFI might be used. One such area concerns how fragmentation distorts common trading benchmarks such as Volume Weighted Average Price (VWAP). This is commonly used to measure a broker’s ability to execute a large block of shares over the day without impacting the market price of the stock concerned. By comparing each trade that comprises the original order with the average market price at that time, it is possible to build up a picture of how those executions compared with the price of the stock over the day. Now, here’s the problem: when a stock is heavily fragmented you no longer have one single venue to benchmark the price at and, without a consolidated tape, there is no “agreed” market price for a stock. Most VWAP algorithms reference the home exchange for a particular stock and so they are becoming increasingly unreliable as an indication of broker performance.

Instead, the broker and his client need to agree which venues are to be included in the VWAP calculation. This could be all possible venues a stock trades at; all venues a broker has access to; or all venues that trade above a certain percentage of the stock. The net result of this is that VWAP will become a meaningless measure as different brokers will use different criteria in its calculation.

The answer could lie in the FFI. This can be used as a benchmark to agree the appropriate valuation of VWAP so, for example, stocks with an FFI less than 1.5 could still just reference the home market and those with an FFI above 2 will need to include all venues in any VWAP calculation. I suspect we would need to calculate the FFI on a more real-time basis for this to really work but it’s a good example of how the FFI can solve a real world problem.

Leave a comment

Copyright © 2018 Fidessa Group Holdings Limited. All rights reserved.

The information contained within this website is provided for informational purposes only. Fidessa will use reasonable care to ensure that information is accurate at the time it is made available, and for the duration that it remains on the site. The information may be changed by Fidessa at any time without notice. We also reserve the right to close the website at any time. No representation or warranty, expressed or implied, is given on behalf of Fidessa or any of its respective directors, employees, agents, or advisers as to the accuracy or completeness of the information or opinions contained herein or its suitability for any purpose and, save in the case of fraud, all liability for direct, indirect, special, consequential or other loss or damages of whatever kind that may arise from use of the website is hereby excluded to the fullest extent permitted by law. Any decisions you make based on the information in this website are your sole responsibility and information on the website should not be relied upon in connection with any investment decision.

The copyright of this website belongs to Fidessa. All other intellectual property rights are reserved.

Fragulator® is a registered trademark of Fidessa Group Holdings Limited.

Reproduction or redistribution of this information is prohibited except with written permission from Fidessa.