Discover the TWAP Strategy: Smart Order Management Tool

TWAP (Time-Weighted Average Price) strategy is an advanced method in algorithmic trading designed to address a major challenge faced by large-scale traders: how to execute massive orders without causing market disruption. TWAP provides an intelligent solution by breaking down large orders into smaller ones, evenly distributing them over time, thereby controlling market impact and achieving better execution prices.

The strength of TWAP lies in its ability to help traders execute trades with high control, leveraging market volatility while minimizing risk. This is why TWAP has become a preferred tool for institutional investors, hedge funds, and professional traders.

What Is the Core Principle of TWAP?

TWAP operates on a simple yet effective principle: instead of placing a large order all at once, the system automatically calculates the optimal timing to split that order into smaller parts, each executed at regular intervals.

When you activate the TWAP strategy, the algorithm continuously monitors market conditions, adjusts the size of each sub-order based on your configured parameters, and executes trades in the most optimized way. This not only reduces your market footprint but also allows you to achieve an execution price close to the market’s average price.

Important Parameters in TWAP Configuration

To use TWAP effectively, you need to understand each parameter and how it influences order execution.

Total Quantity is the total volume you wish to trade via the TWAP strategy. This is the starting point for all other settings.

Duration determines the time span during which TWAP will operate, ranging from 5 minutes up to 24 hours. During this period, the algorithm will split and execute your order until the total quantity is filled or the time expires (whichever comes first). Note that full execution is not guaranteed in highly volatile markets.

Order Frequency specifies the interval between each sub-order. The default value is 30 seconds, but you can customize it according to your needs, within a range of 5 to 120 seconds.

Per-Order Size indicates the size of each sub-order. If you enable Random Orders, each sub-order will be adjusted randomly within ±20% of the specified size, creating unpredictability and reducing the risk of detection. However, other constraints such as maximum order size will still apply.

Order Types and Price Strategies in TWAP

When configuring TWAP, you have two main options for sub-order types:

Market Orders will be placed and executed immediately at the current market price. This guarantees quick execution but may result in slippage during volatile conditions.

Limit Orders allow you to set a specific price, calculated based on a certain distance from the current best bid/ask. Depending on market volatility, your order may be filled as a maker (liquidity provider) or taker (liquidity taker). The calculation formulas are:

• For buy orders: Limit Price = Best Bid Price - Distance (or Bid Price × (1 - % Distance))
• For sell orders: Limit Price = Best Ask Price + Distance (or Ask Price × (1 + % Distance))

Additionally, TWAP offers two advanced settings: Activation Price (the strategy will only start when the last traded price reaches this level) and Stop Price (the strategy will terminate if the price hits this level, often used for risk management).

Practical Example: Calculating TWAP for a 96 BTC Order

To better understand how TWAP works, consider this example with the following parameters:

• Total Quantity: 96 BTC
• Duration: 4 hours
• Order Frequency: 30 seconds
• Order Type: Market
• Random Orders: Off
• Activation Price: $100,000
• Stop Price: $110,000

When BTC price reaches $100,000, the TWAP strategy is triggered. Our system will then begin executing trades optimally over the next 4 hours.

Detailed calculation:

• Total time = 4 × 60 × 60 = 14,400 seconds
• Number of sub-orders = 14,400 / 30 = 480 orders
• Size per order = 96 / 480 = 0.2 BTC

Over 4 hours, every 30 seconds, a 0.2 BTC market order will be placed. The strategy will end when: (1) all 96 BTC are fully executed, or (2) 4 hours pass, or (3) the price hits $110,000 (stop price), whichever occurs first.

Limitations and Rules to Follow

When using TWAP, you should be aware of the following constraints to ensure smooth operation:

• Each account can run up to 20 TWAP strategies simultaneously, and each trading pair can have up to 10 concurrent TWAP strategies.

• Order frequency must be between 5 and 120 seconds per sub-order.

• Minimum order size per sub-order adheres to trading rules and platform specifications. For Spot trading, maximum order size is listed in the Spot Trading Rules. For Perpetual and Futures contracts, the maximum per order must not exceed half of the maximum allowed size. For example, if the max size for BTCUSDT is 100 BTC, the max per TWAP order is 50 BTC.

• The minimum total quantity for a TWAP strategy is calculated as:

  Max(Minimum Nominal Value × Number of Sub-Orders / Last Trade Price × 1.1; Minimum Order Size × Number of Sub-Orders)

  where Number of Sub-Orders = Duration (seconds) / Interval (seconds).

Handling Exceptions: If a sub-order is not fully filled, the system will automatically retry. If it still fails, that order will be canceled, and the system will wait for the next order until the TWAP ends or is terminated.

Margin Management: TWAP strategies do not consume margin until orders are executed. Ensure your account has sufficient balance at execution time; otherwise, the strategy will stop. Closing position orders (sell orders) do not require margin.

Automatic Stop Conditions: The TWAP will automatically terminate if: insufficient balance, position mode change, position value exceeds risk limits, open interest exceeds thresholds, activity exceeds 7 days continuously, or other specified conditions.

Step-by-Step Guide to Using TWAP

Setting Up a TWAP Strategy:

Step 1: Go to the order area, click Tools, then select TWAP.

Step 2: Fill in all required parameters to create your TWAP order. Carefully review each setting before proceeding.

Step 3: Verify all information is correct, then click Confirm to activate the strategy.

Ending a TWAP Strategy:

In the Positions tab, click Tools then select TWAP. You will see a list of active strategies, including order size, average execution price, limit price, etc. To stop a strategy, simply click the End button.

Checking Trade History:

To view executed orders via TWAP, go to Tools History from your account menu. Select the tool type TWAP, then click Details to see all matched orders. Orders from TWAP strategies will be tagged as “TWAP” in the Order Type, making it easy to identify and monitor.