why wouldn't a trader, knowing that it has a 400,000 share order...see if it could not succeed in filling some percentage of it at the VWAP price... and The only thing you "wait on" is the price, not the fill.
Waiting on any unfinished part of an order price presents risk.
Because of sellside desk's desire for both flexibility and to compete for optimal pricing (thus, to be seen working for their clients), for most (and in a liquid market), merely taking what a machine gives from reading the transactions in the market as per an algorithm them is not the best way to go.
If, in the information flow of a stock, he/she becomes aware of something in the market - a large block being put together or distributed, or maybe another block looking for a natural match - with a 1 minute phone call, that news can be reacted to and present a fill price far beyond the scope of VWAP, RPM, or any other measures. Such searches for liquidity can, and often do, present opportunities for under/over market purchases/sales.
In the above situation, a VWAP price for part of the order would hurt the firms' price performance, not help it. And that performance sets the track record for which decisions on immense, extremely lucrative transactions such as transitions and blind bids are made.
But, when block flow is thin, VWAPing may be the way to go.
It seems like a no lose proposition
Again: seems is the operant word.
The observation that volumes are rising - I think it was Jeff - is, IMO, as much a sign of liquidity drying up in the market (where, as previously mentioned, VWAP finds a large degree of its' utility) as it is of growing popularity.
With more volume and renewed vigor in the markets, at whatever point things start to turn around, blocks will come back to the market and the chance - as described above - for improved pricing (markups/markdowns) will become more plentiful. And that may, while not by any means certain, result in less volume going through eVWAP.
Then again...over the years, haircuts on above/below market block transactions have been getting tighter and tighter as a result of increased competition and risk appetites...so, over the next decade one might see VWAP become more popular as a method of trading even those more liquid issues with substantial block flow.
Time and flexibility, however, will always be considerations for both the buyside client and the sellside trader.
LPS5 |
