How Intraday TWAP and VWAP Benchmarks Affect Prices and Liquidity

Summary

This paper models intraday trading, pricing, and liquidity when traders follow dynamic time-weighted average price (TWAP) or volume-weighted average price (VWAP) benchmarks. It solves for competitive equilibrium in closed form and also considers equilibria where traders are not price takers. The model links benchmark-driven trading targets to intraday price pressure: TWAP targets create predictable patterns, while randomness in VWAP targets adds uncertainty to those patterns.

The analysis finds that both benchmark styles reduce liquidity and raise price volatility relative to a setup in which traders have only terminal targets. The authors provide numerical illustrations and describe the framework as computationally tractable. The document does not give the numerical results, calibration details, or empirical market validation, so the conclusions should be read as implications of the model assumptions rather than direct evidence about realized markets. It offers a framework for understanding how scheduling conventions can shape intraday execution conditions.

Key ideas

• Dynamic TWAP targets generate predictable intraday patterns in price pressure.
• Randomness in VWAP target paths adds uncertainty to intraday price-pressure patterns.
• Both benchmark types reduce modeled liquidity relative to trading toward terminal targets alone.
• The model also finds higher price volatility under TWAP and VWAP benchmarks.
• Closed-form equilibrium analysis and numerical illustrations support the theoretical framework.

Tags

# Equilibrium Effects of Intraday Order-Splitting Benchmarks


# Equilibrium Effects of Intraday Order-Splitting Benchmarks









This paper presents a continuous-time model of intraday trading, pricing, and liquidity with dynamic TWAP and VWAP benchmarks. The model is solved in closed-form for the competitive equilibrium and also for non-price-taking equilibria. The intraday trajectories of TWAP trading targets cause predictable intraday patterns of price pressure, and randomness in VWAP target trajectories induces additional randomness in intraday price-pressure patterns. TWAP and VWAP trading both reduce market liquidity and increase price volatility relative to just terminal trading targets alone. The model is computationally tractable, which lets us provide a number of numerical illustrations.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.