hard · Market Microstructure
A trader uses a VWAP algorithm to execute a sell order. During a low-volume midday period, the algorithm sells 5,000 shares when the total market volume is 50,000 shares. If a TWAP algorithm had been used, it would have sold 10,000 shares.
Which statement best describes the market impact risk?
- The VWAP algorithm has higher impact because it trades less when the market is illiquid.
- The TWAP algorithm has higher detection risk because its participation rate is 20% compared to 10% for VWAP.
- TWAP is always superior as it minimizes timing risk regardless of volume profile.
- There is no difference because the total quantity sold over the day is the same.
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