Confused about when to use VWAP vs Implementation Shortfall

CFA Level III
#1

I just did the 2008 test and there was a question about what trades would be suitable for which strategy.

Based on the answers:

VWAP is unsuitable when: urgency is high, order size is a large percent of volume, large bid ask spread.

IS is unsuitable when: urgency is low, higher volume toward end of day.

I can’t find anywhere in the book where it compairs the two, it only explains them seperately. I’m having a hard to even seeing the point of using on or the other. Can someone who gets this stuff summarize it breifly? I understand how to calcualte them, and the advantges and disadvantges of them, but I don’t understand how they are used as trading strategies. I thought they were just used to determine the cost of the trade after the fact.

#2

This is based off memory.

IS = Front loading, buying early, minimize the delay risk and make sure your oder is executed. Basically you dont want to miss out

VWAP = volume weight adjusted. depends on volume of data. basically, you buy a lot when there are a lot of other buyers. And typically when there is more volume there is a smaller bid ask spread. Since you are dependent on volume, your order could be delayed later in the day.

#3

Yeah I wish there was a table to help organize this stuff.

#4

yeah , IS because you are late to the party and need to catch up, so its front loaded.

VWAP - this is a participation strategy. NOT APPROPIATE FOR AN INFORMATION DRIVEN TRADE. can be gamed by the traders

#5

Both approach need good liquidity and the trading volume is small relative to the daily trading volume.

#6

what if the trading volume is large?

#7

Then you would either use a broker (non-informational) or cross-platform electronicial. Both IS and VWAP has huge market impact if the volume is large making it useless from the cost point of value

#8

ah i see. thanks a lot

#9

Use broker or ECN when you order constitutes large percentage (I’d say more than 20-30%) of daily volume.