Yes. You are both right and wrong. Dealers are obligated by their contractual agreements to make offers to trade; but what exchanges didn't specify are what prices their dealers could offer for their trades.
If the dealers don't want to trade, they just make their buy and sell limit orders to be way out of the normal price band. Hence, I want to buy Accenture at $0.01 and sell Accenture at $1000. Yea, I'm meeting my exchange contractual obligation, but who's going to trade with me now?
What happened during the flash-crash is that people's market stop-orders were getting triggered after the initial crash, when the market went down 20%; when all other human traders stepped out of the market, but there were still tons of market stop-orders to sell; guess whose limit buy orders were matched? Accenture buy order at $0.01.
To be fair though, a lot of those ridiculous trades were later busted by the exchanges. But the irony of the whole crash is that the HFT traders actually fanned the fire on the crash and then later rode the wave all the way back up (for the trades that weren't busted anyways).
But the irony of the whole crash is that the HFT traders actually fanned the fire on the crash and then later rode the wave all the way back up (for the trades that weren't busted anyways).
You are conflating two separate groups:
A) Conservative HFT funds who left the markets due to a fear of broken trades.
B) Risk taking HFT funds who stayed in the markets, hoping to make money off volume/higher spreads.
Group A "fanned the fire" by pulling liquidity out of the market. Group B "rode the wave", and in the process mitigated the flash crash [1].
It's a fallacy to lump all HFT firms together.
[1] The market crashed and corrected itself in 10-15 minutes. Without HFT firms, it's likely that it would have corrected itself much later (if at all).
Exchanges like HFT because they make the markets work: http://www.reuters.com/article/idUSTRE65T5IF20100630 From that article: Shortly after the flash crash, U.S. exchange executives told the SEC these firms help keep markets functioning.
Playing games with prices is not providing liquidity.
If you look at http://batstrading.com/ and click through to the fee schedule, you see that Bats pays liquidity providers $0.0024 rebate per share traded.
Yep. That's true, but not because the exchanges are altruistic - but because the exchanges are trying to compete against each other for the greatest volume.
BATS is the latest new-comer to the game and it attracts volume to its exchange by attracting HFT firms who have the highest trade volume with rebates. In fact a lot of these firms don't even try to make money anymore, as long as you have a strategy that breaks even and you collect rebates and trade enough volume. You make a profit.
The definition of liquidity becomes pretty fuzzy here when you have HFT take away liquidity from one market center to offer it to the next depending on how various rebate structure will make them the most money; and exchanges themselves in collusion to pump up their trade volume.
If the dealers don't want to trade, they just make their buy and sell limit orders to be way out of the normal price band. Hence, I want to buy Accenture at $0.01 and sell Accenture at $1000. Yea, I'm meeting my exchange contractual obligation, but who's going to trade with me now?
What happened during the flash-crash is that people's market stop-orders were getting triggered after the initial crash, when the market went down 20%; when all other human traders stepped out of the market, but there were still tons of market stop-orders to sell; guess whose limit buy orders were matched? Accenture buy order at $0.01.
To be fair though, a lot of those ridiculous trades were later busted by the exchanges. But the irony of the whole crash is that the HFT traders actually fanned the fire on the crash and then later rode the wave all the way back up (for the trades that weren't busted anyways).