Since VWAP breaks down the order into smaller blocks in an attempt to match volume during the day, why does it matter that the order size relative to the average daily volume be low for it to be a suitable strategy?
Because you’re going to get front run. VWAP competes with the market, and in this scenario, you’re effectively competing playing against yourself.
Another way to look at it… If your volume is greater then the daily trading volume, YOU ARE the VWAP and will cause huge market impacts. U gonna get killed on implicit cost 
better go see a broker or a pro.
Hmm, still not so clear. If the volume matches, wouldn’t there be little market impact?
Say my buy order fills every sell order during the day. I understand that I’m the VWAP so it’s not meaningful for me to compare my average cost to the VWAP since they are the same.
But how exactly does it increase implicit cost if every of my buy order is absorbed by the market? The price at different depth should remain fairly close to each other, no?
Makes sense if my volume is greater than the ADV, but what if it matches or is, say, 50% of ADV? Would this have any significant market impact or increase implicit cost?
50% is still huge… Imagine trying to pick up 50% of the daily volume on a stock… you’re going to get impacted by price movement.
From the reading, it appears most funds dont want to see anymore than 15% ADV.
Hmm… but how exactly? If there’s enough sell volume to match my buy volume at every depth, how would the stock price increase since you don’t have to move up the order book? What am I missing here.
It’s all about math.
If AMD stock trades 4M shares a day… That means 4 million shares exchanging hands. There are 4M buys and 4 million sells.
Now you want to buy 2M additional shares to the mix? Where are the sellers? There are now 6M buyers and only 4M sellers… price is going to get impacted negatively, meaning it is going to increase. Maybe someone seees the spike in volume and they think something is happening, so the join you… Now your 2M shares is also competing with another 1M buys too…
That example is pretty simplistic but u get the mechanics.
Ahh, now I get it. Thanks!