How Do TWAP and VWAP Algorithms Differ as Execution Strategies for Minimizing Market Impact?

TWAP (Time-Weighted Average Price) is an algorithm that breaks a large order into smaller pieces and executes them at regular intervals over a specified time period, regardless of price or volume. The goal is to match the average price over that time.

In contrast, VWAP (Volume-Weighted Average Price) also breaks up the order but executes it in proportion to the trading volume in the market. It aims to participate more when liquidity is high and less when it is low.

VWAP is generally considered more sophisticated as it adapts to market activity to reduce impact.