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February 1, 2001

VWAPing Problem of Poor Executions: Vendor Launches New Market Beating System

By Peter Chapman

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  • VWAPing Problem of Poor Executions: Vendor Launches New Market Beating System
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A vendor from Philadelphia is betting its technology will make life easier for traders trying to beat the market.

Ashton Technology Group has begun a full-scale launch of the eVWAP component of its iMatch platform. That platform matches block orders before the opening, at the day's volume-weighted average price (VWAP).

The system, a facility of the Philadelphia Stock Exchange, will allow both buyside and sellside traders to anonymously input orders of 5,000 shares or more in 300 of the most liquid listed stocks. Use of eVWAP is intended to reduce or eliminate the possibility that, by the end of a day's trading, a trader will have, on average, executed at prices worse than the average for the market as a whole. About 45 sellside and 45 buyside desks have signed on, according to Philadelphia-based Ashton.

For sellside traders, the system, operated by Ashton unit, Universal Trading Technology Corporation (UTTC), is positioned as an alternative to the often-ineffective "time-slicing" technique traders have used for years to accommodate VWAP executions for their clients. For buyside traders, it is intended to help them match a benchmark - VWAP - against which they are increasingly evaluated.

"By using our system a trader reduces his downside risk of losing to VWAP," said Marc Gresack, president and chief operating officer of UTTC. "These broker dealers are willing to give us their agency orders because they lose to VWAP all the time."

VWAP Battle

Most traders, it seems are losing to VWAP. Cost consultants Elkins/McSherry estimated that 83 percent of all institutional trades in the second quarter of 2000 failed to beat VWAP.

Statistics like that don't sit well with pension plan sponsors, the owners of a good chunk of the country's assets under management. More and more they expect buyside traders to execute trades at no less than the average price for the day.

The current focus on trading benchmarks is reminiscent of the 1980s when indexing took hold among money managers. Many threw in the towel on their active management strategies and switched to passive indexing strategies.

The S&P 500 is a common benchmark. Data still shows most active managers fail to beat the market.

Market Proxy

For traders, VWAP is viewed as a valid market proxy. The derivative price is calculated by dividing the dollar value of all shares traded in a stock on a particular day by the number of shares traded.

Buyside traders are not crazy about VWAP. They don't like to ask their brokers for VWAP executions. And most deny they do so. Accepting VWAP implies their talents are unnecessary. They are paid to beat the market, they say, not to acquiesce to it. "We are supposed to be traders, not VWAPers," said Putnam's head trader Leo Smith.

For the sellside, using a matching system like eVWAP may not be as injurious to their egos. Getting a VWAP execution for their clients, in the conventional manner, can be laborious. Sometimes, it can also be futile. And that outcome affects the sellside's - but not the client's - bottom line.