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BMO Capital Markets - Quantitative Execution Services
Quantitative Execution Services
Volume Weighted Average Price

Objective: To minimize the execution shortfall in relation to the full day or intra day VWAP.

The BMO Capital Markets ‘VWAP’ (volume weighted average price) trading algorithm allows a trader to target a VWAP execution over a given intraday time frame. The VWAP trading algorithm uses historical volume and price information, as well as parameters input by the trader. The master order is split into multiple smaller orders and executed according to the inputs discussed above.

Considerations and Risks

Trading Pattern: As discussed above, the VWAP algorithm is based largely on historical data and executions can be significantly affected by variances from historical norms caused by material news. A stock’s expected deviation from the norm (i.e. volatility or expected volume) should therefore be considered prior to engaging in a VWAP trade.

Bid-Ask Spread: While the VWAP algorithm attempts to capture the liquidity premium by offering or bidding for stock, the likelihood is that the algorithm will also pay the liquidity premium at times. The bid-ask spread is the premium that must be paid for this liquidity. Less liquid stocks will, in most cases, have a wider bid-ask spread than more liquid stocks and thus a higher liquidity premium. An execution that targets a VWAP must be looked at in the context of the size of the liquidity premium. In general, the wider the spread, the less likely a VWAP target will be met.

Trading Volumes and Depth of Market: The total trading volume of a given stock and the size of the VWAP order must be considered when selecting this strategy. First, the stock must have adequate volume and order depth to allow the trader to work the order into the market with little impact on any one given trade. Second, the order must be large

Please contact Quantitative Execution Services (416) 359-5743 if you have any questions

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