VWAP and TWAP market orders

Broker Connectivity
1

Does anyone know how the VWAP or TWAP algos work for IB? I’m confused about market vs. limit orders… If I place a VWAP order where I set price equal to market and also click “attempt to not take liquidity”, what kind of orders is it sending? Presumably, if it is sending market orders, I would always be paying a spread and would then be filled at VWAP + spread?

2

Typically for a VWAP order, IB has the 20-day intraday volume pattern, and they map your order to the pattern. Most volume patterns start heavy in the morning, lighten up through lunch, and then get heavy towards the close.

So, if you put your order in an hour after the open, the VWAP price is going to be heavily weighted towards the close.

VWAP is most useful for very large orders.

3

The VWAP algo places both limit and market orders. There are some other settings that determine how aggressive the VWAP should be (max percentage, end time). If you set it to be aggressive then you kind of force it to use more market orders. If you give it plenty of time, then it will wait patiently at the good side of the spread. So the amount of spread you pay depends on the circumstances and your other settings.

4

VWAP set to “don’t take liquidity” will attempt to fill your order proportionally with the stocks volume over the allotted time. It will post non-marketable orders as long as they are getting filled at the desired pace, but will submit marketable lots if it falls behind.

You’re misunderstanding market vs limit though. Market means the order will continue to submit lots and try to fill regardless of changes in price over the day. Limit means you assign a fixed price point at which the order will stop filling. So if the stock is currently at $10 and you aren’t willing to pay more than $11 then put in $11 as the limit.

5

Hello.

I am using VWAP orders from the Port123 Trade station. With attempt not to take liquidity.
And 5% max percentage.

I noticed that on some stocks the VWAP order does not really take 5% of the liquidity and that it barely works. How do you do in this case?

Also what would be the criteria to determine if VWAP can be used on a stock or not?

Best regards.

Julien

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6

I've puzzled over this a great deal and have come to no conclusions. Interactive Brokers does not place VWAP orders like Fidelity does, nor like Pershing. For relatively illiquid stocks, the orders simply aren't placed frequently enough to get filled. I would suggest raising your max percentage to 50% and take liquidity for relatively illiquid stocks, but I've been unable to come up with any criteria for what is "illiquid." It seems to change from day to day.

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7

Thank you
Price to pay then is to have a higher slippage cost I suspect. Not quite sure then what to consider using a 50% VWAP as slippage cost.
Which might hurt a high turnover strategy.

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8

It may hurt, but you'd have to measure to be sure. That said, I'd really expect a 50% VWAP order at IBKR to effectively cap at something closer to 25% of total market volume since their algos don't appear to include off-exchange TRF-reported volume from my experience using their algos which I describe in this thread. Namely:

All that being said, my use of POV orders is more of a marriage of convenience than anything else. There are several things I do not like about IBKR’s POV algos.

  1. They only participate in IBKR’s ATS (dark pool). Roughly 40-45% of US trading is off-exchange, typically on various brokers’ dark pools, but the IBKR ATS is only ~2% of that off-exchange volume. These are aggregate market statistics of course, but you’re missing out on a lot of liquidity.
  2. They do not participate in opening or closing auctions, which can be about 10% of volume. I haven’t checked but I would expect their VWAP orders to participate.
  3. Even with attempt to never take liquidity set as an option, they don’t seem to do a great job of getting passive fills.
  4. IBKR exposes an “attempt to match block trading volume option” which p123 does not support. It doesn’t appear to be documented anywhere, but presumably the default behavior is to not follow off-exchange trading volume reported to the TRF, which means the POV order is potentially tracking the 55-60% of lit volume, which leads to…
  5. POV orders feel slow to fill. My executed volume is sometimes well under my target percentage of market volume.

I do plan to explore other execution options, though it’s not my lowest hanging fruit at the moment. Fox River has had a very good reputation for execution, so they’re at the top of my list to try.

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