Which factor can significantly distort VWAP calculations?

The choice that identifies a significant factor distorting VWAP calculations is large trades that make up a substantial portion of the volume. VWAP, or Volume Weighted Average Price, is calculated by taking the total dollar amount of trading and dividing it by the total volume of trades over a given period. If a single trade, or a few large trades, comprises a significant portion of the total volume, it can skew the VWAP significantly. This is because larger trades have a more considerable effect on the overall price average compared to smaller trades, which can lead to an inaccurate representation of the average price for that time period.

For instance, if a large institutional buy or sell order is executed, it can disproportionately affect the VWAP, giving a misleading impression of the average price at which stocks have traded during that day. Therefore, tracking VWAP accurately requires careful consideration of trade sizes, especially large trades, to ensure that they don’t distort the average price that traders and analysts rely on for decision-making.