Abstract
In this article, we use execution data from the Goldman Sachs algorithmic trading desk to compare the performance of VWAP and shortfall algorithms. Our analysis shows that the two algorithms work as intended: shortfall performs better than VWAP when short-term (ST) alpha is high, helping traders to reduce alpha loss. The shortfall algorithm also delivers lower execution risk. We also find, however, that the average trader does not optimally allocate orders between the VWAP and shortfall algorithms. Our findings suggest that providers should better educate users on the relative merits of VWAP and shortfall algorithms and better quantify the trade-offs. If users cannot easily differentiate between high and low ST-alpha orders, a practical alternative is to choose the one algorithm that best fits the overall characteristics of their order flow.
- © 2006 Pageant Media Ltd
Don’t have access? Register today to begin unrestricted access to our database of research.