Can somone logically explain the advantage I get from gaming VWAP, in terms of execution cost benchmarking?
Maybe it makes sense in the CFAI vacuum, but if I wait until the close of the day in an upward trending market I am going to look terrible agaisnt my VWAP benchmark. If I wait until the next day to place my order, I can be benchmarked against a “fresh” VWAP…according to the CFAI. Doesn’t that run counter to waiting until the end of the day because I have a good estimate of what VWAP will be for the day?
Should VWAP only be thought of as an day-to-day benchmark so that if a stock is trading at $40 one day and I don’t trade, but it opens at $50 the next day I’m not penalized for the 25% price increase?
Lastly, shouldn’t the opportunity costs of attempting to game VWAP, waiting, completely override the perceived beneift a broker with discretion could receive?
You’re correct: your benchmark is the VWAP for the day you trade.
If the price has risen throughout the day, you don’t want to trade at the end of the day: you’ll be trading well above the VWAP. If you trade early the next day, there’s a chance that you’ll be trading well below the VWAP (if the price continues to rise).
So, in theory, I could sit on an order for weeks and wait for the market to tank towards the end of a trading day and look like a rockstar in terms of my VWAP?
VWAP can be gamed by traders who are seeking favorable executions especially when their performance is being judged based on the execution price vis a vis VWAP. In this they will gauge the VWAP based on the price and volume data. They will buy when the market is trading below the VWAP and vice versa. The intention is to bring the execution price as close to VWAP or even lower than it. But the problem in this is that the order can be delayed in the markets, and there can be significant opportunity cost involved if an order to seek a better execution than VWAP is not traded at all and the market moves e.g. a limit order put at a price lower than VWAP not being traded at all.
Here the intention of having betting execution has and advantage of better price at the cost of no price (no fills at all).
Someone that is a superstar trader able to consitently pull profits from day trading using technical analysis tools like VWAP and moving averages… there is no reason such person should be in an “order execution” type role.
If you have to manage a buy and hold long only type portfolio … I suggest to just execute all orders at the same time everyday… over a long enough time frame… i bet the days you hit or miss VWAP would just cancel out. In a trending up market like 2013-2014 (you would look like a genius buying everyday at the open)