QSG Research: Beware of the VWAP Trap

Tick-level evidence that ‘High Frequency Trading’ is negatively impacting volume participation algorithms.
Investment Research | QSG Analyst Team

This study reveals that significantly higher impact costs and trading velocity are incurred for VWAP algorithms when compared to Arrival Price algorithms, especially when applied to liquid, low price stocks.  This is contrary to the popular perception that VWAP strategies reduce trading costs.  The results suggest that High Frequency Trading (HFT) strategies are materially contributing to these increased costs.  The report also illustrates that the increased order parceling related to VWAP strategies has negative ramifications, including increased tick risk, larger statistical footprints and the possibility of costly trading spirals.  These insights are particularly relevant given the lack of empirical evidence isolating the impact of HFT strategies on institutions employing non-HFT strategies.  The analysis is significantly strengthened by employing a powerful set of tick-based algorithm evaluation measures.


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