VWAP, or volume weighted average price, is commonly defined as the average price of a security over a specified period after weighting each transaction by its traded volume.

VWAP, or volume weighted average price, is commonly defined as the average price of a security over a specified period after weighting each transaction by its traded volume. In formula form, it is

VWAP = sum(price_i × volume_i) / sum(volume_i)

where each observation i represents a trade or bar within the chosen interval. This construction gives more influence to prices associated with larger traded size and less influence to prices associated with smaller traded size.

A simple calculation shows the mechanism. Suppose three trades occur in a period:

1. 100 shares at 10.00 2. 200 shares at 10.10 3. 50 shares at 9.90

The numerator is

(100 × 10.00) + (200 × 10.10) + (50 × 9.90) = 1000 + 2020 + 495 = 3515

The denominator is

100 + 200 + 50 = 350

So the VWAP is

3515 / 350 = 10.042857...

This result differs from a simple arithmetic average of the three prices because the 200 share trade at 10.10 carries more weight than the 50 share trade at 9.90.

As an execution benchmark, VWAP is used to compare an order's realized execution price with the market's volume weighted average price over the relevant interval. The benchmark is neutral in the limited sense that it summarizes observed market trading during that window using a transparent weighting rule based on traded volume. It is therefore useful for post trade analysis and cross venue comparisons when analysts want a reference price grounded in actual transaction flow rather than in a single print.

Covered in depth in the Cross-venue market data & signals pillar hub.