Page 234 - THE MARKET WHISPERER

230 PART 7 - Indicators: The Trader’s Compass

managers are hoping that they will be able to make most of the purchases

at the lowest possible price below the intraday “fair price.” If we draw the

VWAP line across the stock chart, it will show us the price above and below
which 50% of the stock’s volume occurred. In other words, if institutional
traders succeeded in purchasing the stock at lower than the VWAP line,

they will enjoy a bonus, and if they bought it at above that line… perhaps

they need to find a different job.

SMART When a stock trades for a long time around the same price,
MONEY we call this “dynamic fair value” or “balance of power.”

Over time, the VWAP became a favorite among institutional traders,
especially when large hedge fund buyers began using it to review the
intraday successes of the traders they employed. Currently, an institutional
trader’s worth is measured by his or her ability to “beat the VWAP.” Every

transaction the traders make is compared in real time to the VWAP

indicator. Traders are considered successful if they beat the VWAP, i.e., if

the trade’s average buy price was lower than the VWAP at that moment.
The more a trader beats the indicator, the greater that trader’s worth. From
here to calculating trader remunerations was a very short path. Interest

peaked in the VWAP when it eventually became the tool by which bonuses

were calculated for traders.

SMART Do you understand the amazing significance of this
MONEY indicator? Knowing what institutional traders are about
to do at any given moment is vital and highly useful
information!

The VWAP was first recognized as important, and adopted broadly by
traders, at the start of 2003. Originally, it came about as a need by groups
with big money and by funds. The latter were assisted by institutional

traders when buying and selling very large quantities of stocks. The only

way they could supervise the effectiveness of transactions was to instruct
traders to beat the VWAP. Funds generally remunerated institutional
traders on the basis of a 2.5 to 3.5 cent commission per stock. However, a
trader beating the VWAP could receive a bonus of 10 to 12 cents per share
instead.

Most of the activities of institutional traders occur during the first 90
minutes of trading and the last hour of trading. Traders currently operate