What is a major disadvantage of VWAP?

The major disadvantage of Volume Weighted Average Price (VWAP) stems from its behavior during periods of significant trading volume, particularly large trades. VWAP calculates the average price of a security, based on both price and volume, over a specified time frame. When large trades occur, they can disproportionately impact the VWAP calculation, leading to misleading results. For instance, if a substantial buy order is executed, it might elevate the VWAP, suggesting a higher average price that does not accurately reflect the prevailing market conditions or the prices available to other market participants.

In contrast, while options regarding the complexity of computation or dependency on real-time data may raise consideration points, they do not represent fundamental drawbacks of VWAP as a pricing mechanism. Furthermore, the assertion that VWAP is not widely used among traders is inaccurate, as it is a common tool employed by many market participants to evaluate trading performance and make decisions. Thus, the misleading nature of VWAP during large trades becomes the focal point illustrating its major disadvantage.