Sidebar: VWAP: Benchmark Or Millstone?

Stephen Berkowitz, Dennis Logue, and Gene Noser wrote their seminal paper on transactions costs back in the late 1980s proposing that the Trade Date Volume Weighted Average Price (VWAP) should be used as a "benchmark" against which to measure trade execution. Ever since, money managers, brokers, and pension funds have argued about the usefulness and appropriateness of VWAP. In its favor are its simplicity and the statistical basis that underpins it. Against it are the fact that it is too simple (if applied to individual trades) and that managers and brokers can "game it" (i.e., assure that they beat it) but, in doing so, they may well disadvantage the funds for which they are responsible.