Comment Re:The profits have been competed away (Score 2) 476
Actually, Flash Crashes are as much a symptom of automated *slow* traders, like pension companies and such like. They make maybe one or two trades a week, they hold stock for a long time, and they (supposedly) do nice things for their customers (I personally disagree with that last bit, but I'd say people generally like pension companies, whereas they generally don't like HFTs).
When a crash starts, the price of stock X drops below threshold Y which triggers many automated trading systems to dump the (large volumes of) stock they hold. This has a reinforcing effect on the downward trend. Thus, even more thresholds are reached and even more trading systems (and humans) dump stock, and so it goes on. In a weird way, if pension companies made a 100 trades a week instead of just one, then there'd be 100 different thresholds, and so 100 selling trades at different prices - which actually would slow down the crash speed. Keep going with that thought until you get to 1,000,000 trades per week
Meanwhile, HFTs see the downward trend, sell stock somewhere else at a slightly higher price than you can see, then buy it back at the lower price in your market. They're actually not contributing to the downward trend, at least not in the significant way dumping tens of thousands of shares in one transaction does.
In the last NY crash, I seem to remember some algo trader proudly saying "we turned everything off when we saw the crash happening". Actually, you don't want that, because it reduces liquidity, which means you won't get the tighter bid/ask spreads that you would if there was more liquidity. That means if you're desperate to sell, you'll end up selling at some horribly low price, rather than one just a bit lower than the last sale was made at. You can see this with some crazy share prices reported during the crash.
If ever you happen to find yourself holding cash in a market that has no liquidity, then offer really low prices for stock. You'll get filled because someone will be stupid enough to sell at that price (maybe they made their money and they don't care). Then offer really high prices to sell it to someone else - assuming there's someone willing to buy, you'll make a tonne of money. This isn't arbitrage, and carries significant risks (which HFTs generally don't like),
As for HFT vs. HFT - they're quite clever at spotting other players in the market. If they can beat them, they'll play, otherwise they'll move elsewhere. We may have run out of places to go, but that's only so long as the other stocks aren't suitable.