medium · Market Microstructure
A large sell order of 75,000 contracts is placed in the E-mini S&P 500 futures market using a VWAP algorithm. As prices fall, HFT firms engage in 'hot potato' trading, rapidly passing contracts back and forth.
How does the algorithm's reaction contribute to a potential flash crash?
- It switches its execution logic to a slower TWAP schedule, spreading the order evenly over time.
- It reduces its selling rate to avoid creating excessive market impact costs.
- It halts all trading immediately once the LULD circuit breaker bands are triggered.
- It increases the selling rate because the reported market volume is artificially inflated.
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