Since the portfolio is not in breach of its guidelines and the portfolio manager wishes to reduce risk on a controlled and gradual basis, the trader can trade this order in a passive manner to lower the fund’s risk level. In this situation, using a TWAP reference price for the trade and a TWAP algorithm to execute over the next day or two (or longer, depending on the size of the position) would be an appropriate trading strategy. By trading all the orders over the same trading horizon using a TWAP strategy, the trader is maintaining the hedge that exists between the buys and sells, which helps reduce execution risk. And because currency markets in developed economies are very liquid and deep, trading algorithmically will not likely dislocate prices.
Why TWAP?