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This is where an essential problem surfaces: it would be easy to check
traders’ successes if they sold the stock on the same day they bought it.
However, when institutional traders buy stocks in order to hold them over
the long term, how can we know if these traders bought at high or low
prices? How are “expensive” and “cheap” defined over a day of trading?
This is the function covered by the VWAP. It allows defining expensive and
cheap relative to a stock at any point.

   The first platform to present the VWAP indicator was from a company
called Instinet, which included the new tool on the trade screens of many
institutional traders.

   The VWAP calculation. Take a deep breath, and then read this twice:
the VWAP is the average intraday price of a stock as a function of volume at
all levels of price. To calculate the VWAP at any given moment, a sampling
of the price of every transaction made up to the calculation point is taken,
the price is multiplied by the volume of each transaction, all values are
added up to the sampling point, and the result is divided by the accrued
number of shares traded up to that same point (volume). If this explanation
is too complex, don’t try too hard to understand: skip it and just make do
with the example below.

   Example: Let us say that when the trading session opens, the first trade
in the stock of ABC is made at $30, for a quantity of 100 shares. Multiplying
those two figures produces 3,000, therefore the VWAP (dividing the
outcome by volume) is $30. Let’s say that the second trade in ABC is at
$30.10 for 1000 shares. The result of multiplying those two figures is
30,100. Now the sum of those two first trades is [3,000 + 30,100 =33,100]
and the total trade volume is [100 stocks + 1000 = 1,100]. Dividing the
accrued result of 33,100 by the trade volume of 1,100 produces a quotient
of $30.09.

   Had we calculated a regular average of two trades without encompassing
the different volumes of trade for each transaction, the result would have
been $30.05. Does this figure reliably reflect the stock price? Of course not.
It is clear that a transaction of 1000 shares carried far greater weight than
a trade of 100 shares. The VWAP produces a higher average as a function
of including the volume in each trade. It produces what is known as “the
fair price” for ABC.

   Now let us return to the institutional traders: when they receive
an instruction to buy 100,000 shares “on the cheap,” their clients and
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