TWAP

Time-weighted average price is defined as the average price of a security over a specific period of time. Intuitively, TWAP is calculated by first averaging the open, high, low, and close prices for each day. Then as time progresses, an average of these averaged prices is taken to calculate the TWAP. TWAP execution strategy is most useful when investors want to spread out the trades evenly over a specified time period to reduce the impact cost in the trade.

Suppose you want to buy 10000 shares of Microsoft. Putting such an order in one go would vastly impact the current order book in the market. To prevent this, investors can define time period over which they want to buy the shares. Then the algorithm using TWAP will slice a big order evenly into smaller ones and execute them over the defined period.

A TWAP benchmark is preferred over Volume Weighted Average (VWAP) benchmark when the security is illiquid and where volume analysis is not of much significance.