What? None of that made any sense. The only way they can reduce liquidity is to stop trading, or buy it all up, neither of which is bad.
> Remember, if a HFT extracts money that means the actual seller and actual buyer's price never meets which means the market is not doing accurate price discovery instead providing two prices separated by fractions of a second.
Just no, that is not at all correct. HFT increases price accuracy, it doesn't reduce it.
Liquidity means the price is stable not that trades will go through.* Stable prices prevent HFT traders from making money.
Price accuracy is somewhat debatable. Many HFT traders may toss lot's of trades around at a price, but that does not mean you can buy or sell large numbers of shares at that price as they can easily just be trading relatively small number of shares back and forth.
*Dramatic price swings are often tacked onto this. But, that's also relative to number of shares traded. If selling 1,000 shares at ~20.00 each involves any price shift it's hard to call that stable.
> Liquidity means the price is stable not that trades will go through.* Stable prices prevent HFT traders from making money.
No, liquidity means there's limit orders sitting on the market. That is quite literally all liquidity is.
> Stable prices prevent HFT traders from making money.
No they don't, stable prices are good for market makers as it reduces the risk of flipping the spread. You can sit there all day long without prices moving a lick and make bank buying at the bid and selling at the ask getting pad the spread for providing liquidity; this is what HFT's want to do. Directional movement, aka volatility, increases the risk for market makers, aka HFTs as it forces them to predict a direction and makes their trades more risky. Yes, some strategies work better with volatility, but market making is the least risky when price doesn't move at all because you're not making your money from the volatility but from the pocketing the spread over and over.
If orders are going though at different prices that's volatility, even if it's just bid ask spread. Reducing bid - ask spread is how HFT traders are supposed to reduce volatility in the first place. Trade at 10.10, 10.00, 10.10 is price motion even if the trades where buy 10.10, sell 10.00 buy 10.00 because a party needs to sit on the other side of the transaction so all trades are both buy and sell transactions.
That said, you can model only one type of transaction and talk about say sell volatility.
If the ask doesn't move, and the bid doesn't move, orders will happen at both prices due to market orders from both bears and bulls; if you'd like to call that "price moving" you're free too, but I won't. If you were staring at a chart you'd see nothing happening at all because charts don't chart orders, they chart the bid and ask or some middle between them. Regardless, you get my point, the bid and ask do not have to move at all for a market maker to make money, they would in fact prefer the safety of no directional movement.
> Remember, if a HFT extracts money that means the actual seller and actual buyer's price never meets which means the market is not doing accurate price discovery instead providing two prices separated by fractions of a second.
Just no, that is not at all correct. HFT increases price accuracy, it doesn't reduce it.