TWAP

Time-Weighted Average Price (TWAP) is a trading algorithm and benchmark used to execute a large order over a defined time horizon with the aim of minimizing market impact. By spreading the order evenly across the period, TWAP seeks to achieve a price close to the asset’s average price during that window.

In practice, a TWAP strategy divides the total order into equal-sized slices and places instructions at regular time intervals. If the time window is T and the interval is Δt, the order is split into N slices, each of size Q/N, executed at times t1, t2, …, tN. The TWAP price is typically estimated as the arithmetic mean of the prices observed or realized over the interval, or equivalently the average of the executed prices across the window.

TWAP is distinct from VWAP (volume-weighted average price). TWAP uses equal time weights, not trading volume, meaning it does not explicitly account for liquidity or activity levels. It is commonly implemented as a passive execution strategy and can also serve as a benchmark to assess execution quality against a simple time-based target.

Advantages of TWAP include simplicity, predictability, and a straightforward way to reduce market impact for large orders. It is also easy to implement and interpret. Limitations include insensitivity to intraday price dynamics or liquidity, potential underperformance in trending markets, and vulnerability to strategic trading patterns or front-running. If liquidity is sparse, not all slices may fill as planned, leaving part of the order unexecuted or delayed.

TWAP is widely used by institutional traders for large orders, pre-trade benchmarking, and as a reference point in evaluating execution performance.