I keep saying that one of the biggest problems with HFT is the false illussion of at will liquidity.
This is what happened at the "flash crash", many traders providing liquidity, which included most of HFT scene getting out of market, because they (and their algorithms) decided it was not worth the risk.
Old market makers did not operate like this, they were providing quotes even in a very volatile markets. Of course, many lost their shirts doing so, but were obliged by the exchanges to provide this service.
If none of the liquidity providers have an obligation, then we have no liquidity in volatile times, when we need it the most.
yes but if there is an obligation, you could end up with less total liquidity because if you oblige traders to trade when it is a losing proposition to do so, you will get less traders and less liquidity all the time, including volatile times. That's why exchanges actually pay traders to provide liquidity and charge liquidity takers. Imagine if you ordered convenience stores to sell twinkies to people even if they have no money. How would that work in practice ?
This is what happened at the "flash crash", many traders providing liquidity, which included most of HFT scene getting out of market, because they (and their algorithms) decided it was not worth the risk.
Old market makers did not operate like this, they were providing quotes even in a very volatile markets. Of course, many lost their shirts doing so, but were obliged by the exchanges to provide this service.
If none of the liquidity providers have an obligation, then we have no liquidity in volatile times, when we need it the most.