Transaction Cost Analysis A-Z

Transaction Cost Analysis A-Z — November 2008

VI. A New Framework: the EBEX Indicators

price volatility, VWAP scores do not make comparison and proper assessment easy at all. By contrast, the absolute EBEX is shown to be a consistent metric that takes into account contemporaneous market activity and volatility, allowing a direct assessment of execution quality in the prevailing circumstances. I n add i t i on to the VWAP s co re inconsistency, figure 30 indirectly reveals that the daily VWAP should not be viewed as a “fair” price for any order. By nature, the daily VWAP is the average of all executions in a day, including both the opening and closing prices that represent a large portion of market activity. As shown by figure 31, for the selected stock, the daily VWAP is therefore often very close to those prices, which are not always appropriate references for trades executed during the continuous session.

but do not deliver any information about all other market activity dispersion. This prevents direct assesments of the quality of execution.

Figure 32: Absolute EBEX vs. TVWAP score

45 - This window goes from the order release time to the market close of the day.

Figure 31: Daily VWAP vs. closing/opening price

One way of cutting the bias mentioned above is to compute a VWAP over a shorter interval than the day. In figure 32, we plot both the absolute EBEX and the TVWAP scores, where the TVWAP is calculated over the same measurement window as the EBEX. 45 Although slightly reduced, TVWAP scores still exhibit inconsistency because they indicate the deviation from an average

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An EDHEC Risk and Asset Management Research Centre Publication