medium · Market Microstructure market-impact
An institutional trader is utilizing a VWAP algorithm to sell 60,000 shares. The historical volume profile shows 20% of volume occurs in the first hour and 10% in the third hour.
If the algorithm is tracking the volume profile perfectly, how many shares will be sold in the third hour, and what is the primary risk of this strategy?
- 12,000 shares; the risk is that the algorithm executes too early and suffers high impact.
- 6,000 shares; the risk is that the algorithm provides too much liquidity to market makers.
- 10,000 shares; the risk is that the algorithm ignores the U-shaped volume curve.
- 6,000 shares; the risk is that the order may be 'too visible' during low-volume periods.
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