medium · Market Microstructure mmf-core
A large sell order of 75,000 E-mini S&P 500 futures contracts is executed using a VWAP algorithm. During the crash that follows, HFT firms are found to be passing contracts back and forth rapidly. This 'hot potato' trading primarily misleads the algorithm by:
- Creating a permanent price impact that the algorithm fails to properly capture.
- Triggering LULD trading bands that freeze the algorithm's ability to reach the market.
- Increasing the bid-ask spread to levels where the algorithm simply cannot get filled.
- Artificially inflating the volume and accelerating the algorithm's sell rate.
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