What is VWAP and how can prop traders use it?

Author: Petros Kalaitzis

Right now, we are witnessing the transition of prop trading companies to a different business model (where they are heavily invested in trader competitions) and their shift towards technologically advanced setups.

The new focus on automation and various tech tools is a positive trend. It enables prop traders to run smoother operations, experience fewer errors and downtime, and provide more security to traders.

Today, we’d like to discuss one of the many solutions that can enrich and empower prop traders and allow them to deliver the best service to their clients.

What is VWAP?

VWAP, or the volume-weighted average price, is a smart way of calculating the average price of an order.

The VWAP determines the average price of the security based on:

• Trading volume
• Price at the moment of trade

This means that the higher the volume, the more influence it has on the VWAP, and this enables us to see the true average price that all market participants paid over a defined period of time.

Who uses VWAP?

Up until recently, the feature was primarily used by:

• Institutional investors
• Algorithmic traders
• Hedge Funds

They would utilise VWAP to identify the average price for:

• Benchmarking purposes
• Trade execution performance analysis
• Identifying entry/exit points for trades
• Trend indicator

How is VWAP utilised in Trade Processor?

The Trade Processor liquidity bridge uses VWAP to:

• Calculate the minimum, maximum, and average spread
• With VM price execution type for orders based on the depth of the market

VWAP and prop trading competitions

Prop trading competitions are powered mainly by B-book technology. Traders operate within a sandbox that matches the actual market conditions, allowing them to trade safely while presenting no risk for the tournaments’ organiser.

The VWAP technology’s input is paramount to such competitions because:

1. It mimics real-life circumstances and considers the trading volume, thus making the competition’s results more reliable.

2. Traders that enter the competition must learn how different strategies and tactics perform in the actual market, and VWAP demonstrates how to execute orders with minimum slippage.

3. VWAP data is used in the analysis and reviews of the trading strategies.

Transitioning to real-life trading can be difficult for some traders. Implementing VWAP technology helps them better prepare for what’s out there and make confident and data-driven decisions on how to trade.