Exchange-agonistic weighted average price will make slight difference

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BSE, recently, came out with an interesting notice on volume-weightage average price (VWAP). The exchange announced that stock brokers should issue an electronic contract note (ECN) with single WAP for trades done across exchanges per security/common contract for the total traded quantity per settlement.

Till now, there were separate WAPs based on the trading happening on the particular exchange. For example, according to the National Stock Exchange, the VWAP of Reliance Industries on Friday was ₹2,962.79. On the BSE, the VWAP was ₹2,961.81. During the day, it hit a high of ₹2,977 and a low of ₹2,952.20 after opening at ₹2,967.25. The stock witnessed a transaction of 35.47 lakh shares and closed at ₹2,959 on the NSE. While on the BSE, day’s high and low were at ₹2,977 and 2,951.20, respectively.

“With removal of exchange identification, broker can provide single WAP in the consolidated ECN across Exchanges per security/common contract to their clients,” BSE said.

The exchange took the decision following feedback it had received from market participants, post implementation of Interoperability, and the need of single WAP for transactions for a particular security/common contract irrespective of exchange where the trade is executed.

Trend gauging tool

According to investopedia.com, VWAP is used in different ways by traders. This is a trend confirmation tool and traders build trading rules around it. For instance, they may consider stocks with prices below VWAP as undervalued and those with prices above it as overvalued. If prices below VWAP move above it, traders may go long on the stock. If prices above VWAP move below it, they may sell their positions or initiate short positions.

VWAP is mainly a technical tool widely used by both by institutional and retail investors. Mutual fund and foreign portfolio managers give weight to VWAP to buy substantial quantity of a particular stock. Even some retail traders, especially intra-day traders, use this tool.

As the name suggests, VWAP is the average price of a stock weighted by volume, which can be calculated by adding the volume of every transaction multiplied by the price of each deal divided by the total volume for the trading day of a particular scrip.

A singe WVAP across exchanges is a good idea as it will ensure ease in calculating returns by investors, both retail and institutional. Mutual funds will also find it easier to show the returns of their funds with single VWAP for a stock. There will be uniformity in the returns disclosed by mutual funds if all of them use a single VWAP as closing price.

A single VWAP across the exchanges will capture every single trade and price and will ensure that the price is not distorted by trades punched with small volumes. Trades with higher volume have higher weight in WVAP.