I. What’s Time Weighted Average Price (TWAP)?
Time Weighted Average Price (TWAP) is an advanced strategy for trading large orders to reduce its impact on the market price. In practice, it splits a large order into several small orders and executes them within a duration (from a few hours to a day).
The splitting of a large order into a few small orders maximally reduced its impact on the market price. Besides, it also diminishes the trading cost in comparison to buy/sell a large order in the market.
II. Definitions
1. Order Price
Traders set the entrusted price according to the “price distance” and “proportion” according to the liquidity. Taking buying as an example, at the beginning of the strategy, the entrusted price with a certain price distance/proportion up from the “sell 1” price is used to entrust a small buy order. If not set, it will be executed according to the system default slippage.
2. Activation Price
The activation price is to activate the TWAP strategy.
When buying: the market price ≤ activation price, the order is activated.
When selling: the market price >= activation price, the order is activated.
Take buying as an example. When the market price ≤ activation price, the TWAP strategy is activated. The entrusted price with a certain price distance/proportion up from the last selling price is used to entrust a small buy order.
Please note that if the price distance is too large, the TWAP strategy may not be triggered promptly. So, traders shall set a proper price distance.
3. Time Interval
When the TWAP strategy is activated, small orders will be entrusted as per the “time interval” pre-setted.
Take 5 min time-interval as an example. When the last order is completed, the next order will be entrusted 5 min later.
4. Single Quantity
Single quantity is the “Entrusted amount” of each small order. The single quantity will multiply a random ratio automatically to increase trading privacy.
The formula is: Single quantity = Single quantity ✖️ random ratio + unfilled amount of the last order
Note: the random ratio varies from 0.7 to 1.3.
5. Total Amount
Traders fill in the total amount, which will be splitted into several small orders to entrust in the market by the TWAP strategy.
III. How to use TWAP?
There are basic settings and advanced options in setting TWAP strategy. Basic setting is much easier where the system executes the strategy automatically. Traders can customize their TWAP strategy by clicking “Advanced options”.
Basic Settings
Visit Gate website, enter spot or margin trading, click “strategic order”, and click “TWAP”.
Traders just enter Total Amount and Duration, the system will automatically split the total amount into several small orders to entrust within the duration.
The longer the duration and the larger the total amount, the more small orders will be splitted.
Advanced Options
Order Price
It is to set the entrust price for orders. Traders can select “price distance” or “proportion” to set the entrust price.
Price Distance
Entruted buying price = Last selling price + price distance
Entrusted selling price = Last buying price - price distance
Proportion
Entruted buying price = Last selling price ✖️ (1 + proportion)
Entrusted selling price = Last buying price ✖️ (1 - proportion)
Activation Price
When buying: the market price >= activation price, the order is activated. When selling: the market price >= activation price, the order is activated.
Time Interval
Take 5 min time-interval as an example. When the last order is completed, the next order will be entrusted 5 min later. The interval can be from 1 min to 12 hours.
Single Quantity
Single quantity is the entrust amount of each small order.
Single quantity = Single quantity ✖️ random ratio + unfilled amount of the last order
Note: the random ratio varies from 0.7 to 1.3.
View the order
Traders can view the orders at “Open Orders” - “TWAP”. Go to “Order History” to view filled orders. Go to “Open Orders” to view unfilled orders, and go to “Trade History” to view filled orders.
Cancel Orders
Click “cancel” in “Open Orders” to cancel an unfilled order.
IV. Examples
Basic Setting Only
Suppose Jack wants to buy 1BTC within 6 hours. In the basic setting, he only needs to enter the total amount of 1BTC and the duration of 6 hours.
Then, the system will entrust the orders by default settings until the 1BTC orders are filled or the 6H duration reached.
Advanced Options
In advanced options, Jack can customize its TWAP strategy. Jack can set:
Time Interval: 5 Min
Single quantity: 0.1BTC
Duration: 100 Min
Activation Price: 30,320 USDT
Order Price variance: 0.2%
Suppose BTC current market price is $30311, which is less than the activation price of $30,320, so the TWAP strategy is activated.
Suppose the random ratio is 0.1x0.8=0.08BTC for the first order. If the last selling price is 30318, the entrust price will be 30318x(1+0.2%)=30378.6 USDT. Then, all the selling orders below 30378.6 USDT can be taken. Suppose the order filled 0.05BTC, with 0.05BTC unfilled.
In the 2nd entrust order, the amount will be 0.1x0.8+0.05 (the last unfilled amount) = 0.13BTC. The entrust price will be the latest last selling price x (1 + 0.2%). The 2nd order will be placed 5 minutes later.
……
In the 12th order, the order amount will be 0.1x0.8 + the 11th unfilled amount. The entrust price will be the latest last selling price x (1 + 0.2%). The order will be placed in the last 5 minutes of the duration.
V. FAQ
1. What should I do If the duration is reached but the orders are not completely filled?
The unfilled orders will be canceled automatically. Traders shall re-set the TWAP strategy.
2. How many orders can I entrust?
The number of orders is based on your total amount and the duration. The larger the amount and the longer duration, the more orders will be placed.
3. Why are my orders not filled?
Poor liquidity may lead to part of an order not filled. The unfilled part will be entrusted into the next order automatically.
4. What’s the difference between the upgraded TWAP and Time Condition?
The TWAP strategy is much easier for users. In Basic Setting, users can just enter the Total Amount and Duration, and the system will execute the strategy automatically and fill the order with the best price fastly.
The advanced options offer more customized settings. Users can set price distance or slippage proportion, activation price, time intervals, single quantity, etc. It enables traders to set their own strategies and fill the large deal with efficient cost.
Gate reserves the final right to interpret the product.