I spent my working life flying real aircraft, but retired before glass cockpits became common.

When trying to fly at a round 1000 feet altitude using the FSX integrated display, the altimeter reads X000 when just above the datum, and (X-1)000 when fractionally below.  So you get a 1000 feet change in indicated height for a couple of feet change in the real world.  Of course, if you continue down to below (x-1)900, then all becomes reasonable again.

This ambiguity seems to me both misleading and dangerous.

Is this a realistic simulation of a real display or a programming error?

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No, it's simply some buggy coding that crept into that particular gauge...