Volume-Weighted Average Pricing by Michael Tanksley, Ph.D.
What price should you aim to beat in your trades? Here’s what the pros use.
J. Welles Wilder once said, “Somewhere amidst the maze of open, high, low, and close prices is a phantom line that is the real market. ”With that in mind, what numbers should you use to make your financial decisions? It’s hard enough to make those decisions, but it ’s even harder when you aren’t using numbers that truly represent the market. Volume-weighted average price (VWAP)is no phantom; it’s the solution Wilder was looking for and what Wall Street professionals depend on.
On the brokers’ floor, VWAP is the benchmark for rating
trades. Brokers use the number to know whether their trades are above or below market value. VWAP represents what’s really happening in the market because it takes into account not just minute-to-minute prices but also trading volume. That’s why the biggest question brokers ask each other about any trade is, “Did you beat the VWAP?”