I can't help but wonder if this level of liquidity is only really useful to HFT, if it is something that HFT is both the primary provider and beneficiary of, and if they're sort of using their existence to justify their existence, so to speak.
Chris uses mom and pop trader examples to explain the concepts here, but the fact is that Algo trading now accounts for much of the volume on major exchanges, and HFT is probably a decent portion of that.
I'd love to see Chris or any other HFT trader's take on that. He sort of does near the end, but would be interesting to see a more in depth discussion:
>Although the latency competition provides little to no value to the end consumers, all HFTs must play the game. If they don’t, a faster HFT will beat them to market and their order flow will be reduced.
This is a very real social cost of HFT - many very smart people spend a lot of time and effort reducing the latency of trading systems. I’m no fool, but when I worked as an HFT I often felt like one. The field contains a lot of very smart people, and the world would probably be better off if the stock market had a little more latency and those smart people were building products for the world. For example, after leaving HFT I built a useful consumer product.
But with current market mechanics, the global optimum where trading is marginally slower and smart people build useful products is impossible to reach. The latency arms race has us stuck in a suboptimal Nash Equilibrium which is similar in character to signalling competitions (e.g., the education bubble).