What is TWAP - Automated Trading Tool for Professional Investors

What is TWAP? It is an important trading tool in the modern investment world, designed to help traders execute large trades in a controlled and efficient manner. An abbreviation of “Time-Weighted Average Price,” TWAP is a popular strategy among institutional funds, portfolio managers, and algorithmic traders. By breaking down large orders into smaller ones executed at predetermined intervals, this tool helps minimize the market impact of huge trades and achieve an average price that reflects the true market value.

Basic Concept - What Is TWAP and Why Is It Important

When a trader wants to execute a very large order, doing so all at once can cause sudden market fluctuations. This may result in the trader not getting the best possible price or even triggering a “market shock” that adversely affects the price.

TWAP addresses this issue by dispersing a large order into smaller orders, executed at regular intervals over a set period. This approach not only prevents sudden market volatility but also allows traders to take advantage of price fluctuations during the execution window, thereby achieving a reasonable average price and predicting the trade outcome more accurately.

How TWAP Works - Understanding the Control Parameters

The TWAP strategy operates based on a set of parameters configured by the user. The algorithm calculates the optimal timing to place and execute each sub-order based on these parameters. Let’s explore each parameter in detail:

Total Quantity - The total volume you want to trade via TWAP, e.g., 96 BTC.

Execution Duration - The time span during which the strategy will run, configurable from 5 minutes up to 24 hours. During this period, the algorithm will continuously place sub-orders until the total quantity is filled or the time expires. Note that full execution is not guaranteed in highly volatile markets.

Order Frequency - The interval between each sub-order, defaulting to 30 seconds but adjustable. This frequency can be set from 5 seconds to 120 seconds per order.

Size of Each Sub-Order - The volume of each individual order. If the “Random Orders” feature is enabled, each sub-order will vary by ±20% from this value, making the trading pattern more random and less predictable.

Random Order Feature - When enabled, the size of each sub-order will be randomly adjusted within ±20%, while still adhering to other constraints such as maximum order size.

Order Type - You have two options:

1. Market Order: Placed and executed immediately at the current market price.

2. Limit Order: Placed at a certain distance from the best bid or ask price. These orders can be filled as maker or taker depending on price movements. Calculation formulas are:

   • Limit Price (Buy) = Best Bid - Spread or Best Bid × (1 - Spread%)
   • Limit Price (Sell) = Best Ask + Spread or Best Ask × (1 + Spread%)

Activation Price - The TWAP strategy will only start once the most recent trade price reaches the set activation price.

Stop Price - The strategy will automatically terminate if the most recent trade price hits the stop price you set.

Practical Example - Applying TWAP with Specific Parameters

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

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

When the price reaches $100,000, the TWAP strategy is triggered and begins executing trades. First, calculate total seconds: 4 hours × 60 minutes × 60 seconds = 14,400 seconds.

Next, divide total seconds by order frequency: 14,400 ÷ 30 = 480 sub-orders to be placed.

Then, divide total quantity by number of sub-orders: 96 BTC ÷ 480 = 0.2 BTC per order.

The algorithm will place a 0.2 BTC market order every 30 seconds over 4 hours. The process stops when one of three conditions is met first: all 96 BTC are filled, the 4-hour duration ends, or the price hits the stop price of $110,000.

Limitations and Conditions of TWAP Operation

TWAP must adhere to certain limits to ensure stable operation on the platform:

Strategy Quantity Limit: Each account can run up to 20 TWAP strategies simultaneously, and each trading pair can have up to 10 TWAP strategies active at once.

Order Frequency Range: The interval between orders can be set from 5 seconds to 120 seconds per order.

Sub-Order Size:

• Minimum size must comply with spot trading rules or derivatives trading parameters.
• For spot trading, maximum size is defined within trading rules.
• For perpetual and futures contracts, maximum size per sub-order must be ≤ half of the maximum order size. For example, if the limit is 100 BTC, each sub-order can be up to 50 BTC.

Minimum Quantity Calculation: Minimum total quantity = Max(Min Nominal Value × Number of Sub-Orders / Last Trade Price × 1.1, Minimum Order Size × Number of Sub-Orders)

Handling Partial Fills: If a sub-order placed by TWAP is not fully filled, the system will attempt to re-match. If unsuccessful, the order will be canceled and the next order will be placed until the strategy ends or terminates.

Balance Requirements: TWAP does not use margin before executing orders. You must ensure sufficient account balance at execution; otherwise, the strategy will stop. Closing orders (sell orders) do not require margin.

Automatic Termination Conditions: The strategy will automatically stop if:

• Insufficient balance to fill orders
• Position mode changes
• Position value exceeds risk limits or open interest limits
• Continuous operation exceeds 7 days

How to Set Up and Manage TWAP Strategies

How to Create a TWAP Strategy

Step 1 - Access TWAP Tool: In the order interface, click Tools, then select TWAP from the available tools.

Step 2 - Fill in Parameters: Create a TWAP order by entering all required parameters such as total quantity, duration, frequency, sub-order size, order type, activation price, and stop price.

Step 3 - Confirm: Review all information for accuracy, then click Confirm to launch the strategy.

How to Stop a Running TWAP Strategy

To stop an active TWAP, go to the Positions tab, click Tools, and select TWAP. You will see the details of the strategy including size/total, average fill price, limit price, and other info. Click the Terminate button to immediately stop the strategy.

How to View Order and Strategy History

To see the full history of TWAP activity, go to Tools History, select TWAP as the tool type. Click Details to view individual filled orders from the strategy. In the Order History section, orders placed via TWAP will be labeled “TWAP” in the Order Type column, making it easy to distinguish from regular orders.

Benefits of Using TWAP

TWAP offers many advantages for professional traders. First, it helps reduce market impact when executing large trades, protecting prices from adverse volatility. Second, this technique allows traders to achieve an average price rather than accepting a less favorable fixed price. Third, TWAP provides better control over order execution, enabling users to customize strategies to their specific needs. Finally, this tool is especially useful in markets with changing liquidity or when accumulating positions without causing significant price movements. Thanks to these benefits, TWAP has become an essential tool for institutional funds, portfolio managers, and professional algorithmic traders worldwide.