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Execution algorithm

An automated schedule for working a large order into the market over time, trading off market impact against the risk that the price moves while you wait.

The fundamental tension: trade fast and pay market-impact, or trade slowly and take timing risk. Every algo is a particular answer to that trade-off, and the right answer depends on your order size relative to volume and on how urgent your signal is.

The main families are schedule-based (twap-algorithm, vwap-algorithm), participation-based (pov-algorithm), and cost-based (arrival-price-benchmark). Liquidity-seeking variants add opportunistic taking when size appears.

For retail-sized orders in liquid instruments, none of this is needed; a limit order at the touch is fine. Algos start to matter when your order is a meaningful fraction of the book, which for a typical mid-cap might be a few thousand shares.

Related: twap-algorithm, vwap-algorithm, arrival-price-benchmark, market-impact

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Intraday price swinging around VWAPA price line for one trading day weaving above and below a smoother VWAP line, with a band drawn one standard deviation either side of it.INTRADAY PRICE AND VWAPprice9:3012:4516:00+1 SD bandVWAP−1 SD bandIllustrative session. VWAP starts fresh at the open and firms up as the day fills in.
VWAP and its standard-deviation bands. VWAP is the day's average price weighted by how much volume traded at each price, so it shows where the bulk of the day's business was done. The bands sit one standard deviation either side, and price here swings between them all session.

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