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Algorithmic trading (i.e. Algo Trading) is one of the many techniques widely used by institutional investors. It is popular on the professional level because the program-driven logic can execute orders and generate profits at a speed and frequency that is beyond human’s physical limit. At Saxo, we enable all our clients to trade like a sophisticated professional but with easy to understand interface. We will use the following weeks to go over different common algo strategies one by one, with an aim to share our knowledge with common users.
Volume Weighted Average Price - VWAP
VWAP works an order over a user-specific time interval, attempting to match or beat the Volume-Weighted Average Price (VWAP) for that time interval. The order is executed proportionally with the expected market based on historical volume distribution. Since the VWAP is executed according to the expected market volume the strategy should not be used on days where the actual market volume is deviating significantly from the normal historic market volume.
Parameters to consider
Limit Price (Optional):
Strategy can be used both at market level or with a specified limit price
Start / End Time (Optional):
If not specified, start and end times are by default set to market open and market close, respectively. Start and end times are defined in local exchange time.
Max Participation Rate (Recommended):
Ability to place constraint on the maximum percentage of trade volume in which the order should participate. This parameter can protect the user from overly exposed in the market when order size is large compared to market level.
In Open / In Close Auction (Optional):
The user can decide whether to participate in opening and/or closing auctions. If not specified these are by default set to include auctions.
I Would Price (Optional):
Attempts to complete or trade up to the price specified. Within this price the order can be up to 100% of trade volume.
User should also be aware of the prevailing market condition and exercise necessary caution when the market deviates from historical distributions. The strategy relies on historical volume profile of the underlying asset to determine the pacing and aggressiveness on filling the working order. Should the underlying asset come across market moving news release (e.g. unexpected company news driving demand of shares, etc), trading of the underlying asset may display uncommon pattern which could discount the relevance of historical volume distribution, hence hindering the algorithm to achieve target benchmark on the market. It is advisable for clients to tighten the working timeframe or impose price limit under these exceptional circumstances.