Time-Weighted Average Price (TWAP)
The average price of a security calculated over a set time period, used to minimize market impact of large orders.
What is TWAP?
Time-Weighted Average Price (TWAP) is the average price of a security over a specified time period, calculated by dividing the sum of all transacted prices by the number of time intervals. As an execution strategy, TWAP involves slicing a large order into equal-sized smaller tranches executed at regular intervals over a defined time window, with the goal of achieving an average fill price close to the TWAP benchmark. By spreading execution evenly over time, institutional traders minimize market impact—the price movement caused by their own buying or selling pressure. TWAP strategies are most effective in liquid markets with relatively stable intraday price patterns. They are less adaptive than VWAP strategies because they ignore trading volume in their order distribution, making them less efficient when trading activity is concentrated in certain periods of the day.
Example
A pension fund needing to purchase $50 million of a midcap stock uses a TWAP algorithm that distributes the order into 500 equal tranches over a 6-hour trading window, executing one tranche every 43 seconds. This approach avoids the large price spike that would result from placing the full block order at once.
Source: Investopedia — TWAP