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VWAP for stock index futures trading?


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VWAP for stock index futures trading?

  #11 (permalink)
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I use it on a 24h-chart because less volume means less impact, so the day-session has much more impact

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  #12 (permalink)
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brakkar View Post
Should it be calculated including pre stock market hours, or should it be calculated on stock market hours regular session? (in the case of the ES)

In the case of the ES, you can run an ETH VWAP that starts when the evening session kicks in, and let it continue to roll into the RTH session (i.e. it doesn't stop calculating when RTH starts). You can then have another VWAP that starts at the beginning of RTH. Essentially giving you 2 rolling VWAPS in the RTH session (just colour them differently to avoid confusion). You can look for reactions at both VWAPS during RTH, but note that the rolling ETH VWAP if tested a few times during RTH can be treated like a Kleenex and discarded as a point of reference.

You can also have a static ETH VWAP, meaning that at RTH open you project a static line of the ETH VWAP price (extended to the right) as well as letting one continue to roll.

Stocks are slightly different, but using regular RTH VWAP and historical RTH VWAP is the best plan of action.

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  #13 (permalink)
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brakkar View Post
Should it be calculated including pre stock market hours, or should it be calculated on stock market hours regular session? (in the case of the ES)

There's some subtlety in this. Many traders will use one or the other, many will look at both. Trying both might be a good first idea, and then seeing what you think.

Remember that the volume before the regular session is much lower than after the RTH open, so after a fairly short time (an hour or two), the ETH and RTH VWAPs will tend to get closer, since it is volume-based.

It's a trading decision, with ES, whether and how to take into account the trading that happens before the open, and different traders have different views. Some don't even include the pre-open and post-close price on their charts. Others want to see the whole picture. Since the regular hours' trading mainly involves a different trading population than the pre-open trading (more US traders after the regular open vs. more Europeans earlier), you can make a case to use either or both ETH and RTH VWAPs, depending on how you see it.

Try and see. If there were only one way to trade, there would be no difference of opinion, and no one to trade with.

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  #14 (permalink)
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I have personally never found much use for it because it is so dependent on when you start it and for how long it has been running.

Large hedge funds in 2019, spending millions a year on electricity for computers crunching numbers surely have more sophisticated market impact models than just transacting above or below VWAP starting at 9:30 EST. Maybe that was true 20 years ago.
I just don't think there is much human execution traders at this point. If you need to transact a large amount of a financial instrument it is going to be done by an algorithm in 2019. Then market impact modeling is a field on to itself.

Edit. I have the book Market Microstructure in Practice second edition from 2018.

It says VWAP/TWAP is still used in Asia and Europe some but in the US everything is Liquidity Seeking Algorithms?? No idea what that is.
https://www.fixglobal.com/home/liquidity-seeking-algorithms-how-can-alpha-expectations-influence-strategy-selection-optimisation/


If VWAP is useful for you I would think VWAP/TWAP divergence would be cool.


Last edited by centaurer; May 16th, 2019 at 08:13 PM.
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  #15 (permalink)
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centaurer View Post
I have personally never found much use for it because it is so dependent on when you start it and for how long it has been running.

Large hedge funds in 2019, spending millions a year on electricity for computers crunching numbers surely have more sophisticated market impact models than just transacting above or below VWAP starting at 9:30 EST. Maybe that was true 20 years ago.
I just don't think there is much human execution traders at this point. If you need to transact a large amount of a financial instrument it is going to be done by an algorithm in 2019. Then market impact modeling is a field on to itself.

Edit. I have the book Market Microstructure in Practice second edition from 2018.

It says VWAP/TWAP is still used in Asia and Europe some but in the US everything is Liquidity Seeking Algorithms?? No idea what that is.
https://www.fixglobal.com/home/liquidity-seeking-algorithms-how-can-alpha-expectations-influence-strategy-selection-optimisation/


If VWAP is useful for you I would think VWAP/TWAP divergence would be cool.

VWAP is massively relevant today. It has nothing to with executions by a human or a computer, it is all about benchmarking transactions.

Algorithmic trading is rapidly becoming the preferred method for clients to acquire and liquidate positions of stock. Typically a computer based algorithm is used to buy (or sell) a position while attempting to stick to a client selected benchmark. One of the oldest and most popular of these algorithms is VWAP (volume weighted average price). The popularity of the VWAP benchmark for both brokers and clients stems from several reasons.

Firstly, it is very simple to calculate, facilitating easy post-trade reporting. Secondly, it encourages the splitting of larger orders into smaller orders, reducing demand for large liquidity and hence market impact/volatility.

Finally, given a time interval, it is considered a "fair" benchmark price, in the language of total cost of transactions, VWAP is a price which is an unbiased estimate of prices that could be achieved by any randomly selected nonstrategic trader.

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  #16 (permalink)
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JonnyBoy View Post
VWAP is massively relevant today. It has nothing to with executions by a human or a computer, it is all about benchmarking transactions.

Algorithmic trading is rapidly becoming the preferred method for clients to acquire and liquidate positions of stock. Typically a computer based algorithm is used to buy (or sell) a position while attempting to stick to a client selected benchmark. One of the oldest and most popular of these algorithms is VWAP (volume weighted average price). The popularity of the VWAP benchmark for both brokers and clients stems from several reasons.

Firstly, it is very simple to calculate, facilitating easy post-trade reporting. Secondly, it encourages the splitting of larger orders into smaller orders, reducing demand for large liquidity and hence market impact/volatility.

Finally, given a time interval, it is considered a "fair" benchmark price, in the language of total cost of transactions, VWAP is a price which is an unbiased estimate of prices that could be achieved by any randomly selected nonstrategic trader.

I was just trying to read up on all this stuff.

I just mean the idea that there are human traders being evaluated on executing above or below VWAP is outdated. I feel like that gives new traders the false idea you should just short above VWAP and buy below VWAP.

VWAP/TWAP is not completely outdated but I believe the amount of fragmentation in US markets makes it less than ideal today.
Here is the options Citi offered in 2017
https://uat.citi.com/mss/products/equities/e_trading/docs/2017-EE-Algo-Quick-Guide.pdf

Dagger is Citi's "liquidity-seeking algorithm". I am sure VWAP/TWAP cost less transaction cost wise if you call Citi and get a price quote than Dagger. I am sure there are different prices for Dagger 1 to 5 too depending on the need of the trader/hedge fund.

Reuters estimates that 75% of global volume is algorithmic.


Last edited by centaurer; May 16th, 2019 at 10:16 PM.
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  #17 (permalink)
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The interview with Goldman's head of corporate buybacks he said boards of directors are very interested in their performance compared to VWAP. What more do you need to know? 90% of the net long cash is being judged by this standard. Says NOTHING about execution.

Really for price action trading the most important is the 20 period EMA. But hey, FT 71 and many others have VWAP, so I do also. Usually, no matter how far away price gets they manage to tag up to it before the close. It also tells you who is running the market. When VWAP is just road kill you know it's us day traders running the show.

This afternoon when the market was sliding, where did it stop dropping (after a nice bear bar) and go into consolidation. So yes, just like yesterday's close and prior support and resistance it is a good reference, or sign post some times. Other times you wonder why you are cluttering your screen.

IF you want to quest for the Holy Grail set up look elsewhere. VWAP is a tool not a machine.

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  #18 (permalink)
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centaurer View Post
I was just trying to read up on all this stuff.

I just mean the idea that there are human traders being evaluated on executing above or below VWAP is outdated. I feel like that gives new traders the false idea you should just short above VWAP and buy below VWAP.

VWAP/TWAP is not completely outdated but I believe the amount of fragmentation in US markets makes it less than ideal today.
Here is the options Citi offered in 2017
https://uat.citi.com/mss/products/equities/e_trading/docs/2017-EE-Algo-Quick-Guide.pdf

Dagger is Citi's "liquidity-seeking algorithm". I am sure VWAP/TWAP cost less transaction cost wise if you call Citi and get a price quote than Dagger. I am sure there are different prices for Dagger 1 to 5 too depending on the need of the trader/hedge fund.

Reuters estimates that 75% of global volume is algorithmic.

I do think that we are not talking about human traders making decisions and being evaluated by comparison to VWAP or anything else. In these kinds of large transactions, I expect that human traders are not involved at all, and they really shouldn't be. A very large buy or sell -- which would not get a good execution if placed as one trade -- will be broken into many pieces and parceled out according to algorithms that aim to achieve the best overall price. My understanding is that VWAP is considered a benchmark, often by the firm's clients, as a measure of the day's average price, and so the aim is for the average price of the entire transaction to equal or beat it.

Now for a full disclosure: while I believe this story has some truth to it and currently still applies, it is not something I know that much about directly, and I don't think this narrative matters that much anyway. I follow many of the active journals on FIO, and some traders have quite consistently made use of VWAP profitably, others have used it but not profitably, and a great many, profitable or not, have not used it at all. Everyone can have a theory of what will work (and generally, everyone does ), but trading is less a matter of theory and much more a matter of practice, execution and consistency.

Which simply means that if you can make VWAP or anything else work for you, power to you. But it's a matter of working out a strategy and making it work.

I absolutely agree with this comment: "I feel like that gives new traders the false idea you should just short above VWAP and buy below VWAP. " If trading were that simple, it would be simple to get rich, and it's not....

So to the original poster's original question,

brakkar View Post
Is this indicator relevant in the stock index futures world? Is it used and watched by large professionals? Should I even bother watching in when trading intraday on the ES/MES?

... it should work about as well for the index futures as it works for stocks. If you have success with it in one, you can expect that to carry over. Also, you don't have to try to use everything that works, nor that works for someone else (or that someone thinks works.) Putting it to use is a strategic choice. Try it and see what you can make of it.

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  #19 (permalink)
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It seems the human role in today's market vs algos is way, way underestimated.
If algos were so dominant, trading volume on 24H instruments would be evenly distributed over 24 hours range, with algo relentlessly trading in and out. They don't need to sleep after all.

Quite on the contrary: volume is at its top on the regular trading session starting at 9:30 EST. Even more, most of the volume is consumed in the first hour of trading: traders get at their desk, attain their objective in the first hour of the day and are done.
This is universal. Even on Forex markets on European timeframe, we can notice the same pattern of the first hour.

Market rhythm seems very biological, human. And as long as it is the case, the human factor, even if built in algos is still very predominant and humand are heavily supervising those algos as proven by the circadian rhythms of the markets.

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  #20 (permalink)
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Trailer Guy View Post
The interview with Goldman's head of corporate buybacks he said boards of directors are very interested in their performance compared to VWAP. What more do you need to know? 90% of the net long cash is being judged by this standard. Says NOTHING about execution.

I have had great confusion though about how it is used. Johnnyboy I think clears it up though with this
"given a time interval, ...VWAP is a price which is an unbiased estimate of prices that could be achieved by any randomly selected nonstrategic trader."

So if you get a buy signal at 11am and execute until complete and that takes until 3:30pm an execution algorithm better be at least as good as VWAP starting at 11am to 3:30pm since that is basically the naive strategy price. It is a bench mark for that trade over that specific time period. It has always been presented to me that you start it at the cash open as if it is a single daily level. That would only apply if your buy/sell signal is at the cash open I believe.

I am sure Goldman has liquidity seeking algorithms like Citi Dagger that if you can't at least beat the randomly selected nonstrategic strategy that VWAP represents then it is useless and just execute at VWAP.

I can only find something from 2011 on Goldman's LSA. Sonar, Sonar Dark and Stealth.
"Sonar algorithmic strategy aggregates liquidity across multiple public and dark venues while mitigating adverse executions. Sonar Dark aggregates liquidity across multiple dark and grey venues while mitigating adverse executions.
Stealth algorithmic allows traders to capture all displayed and dark liquidity up to the order’s limit price without posting to public markets. "

So I am sure Goldman is interested to see that those algorithms can beat VWAP for the same time period or no one is going to pay for them. It would also give them a measuring stick to judge the 3 algorithms against each other by how much they beat VWAP.

That is hugely different though than starting a VWAP at 9:30 and putting std deviation bands on like I have mostly seen.


Last edited by centaurer; May 17th, 2019 at 07:46 AM.
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