[1e-9]

The markets need aggressive orders as well as passive orders. There is nothing inherently bad about liquidity taking. It is generally just as beneficial as liquidity providing. If anything, the misuse of passive orders is probably more common than the misuse of aggressive orders because passive orders can be used to influence a market without trading.

Even the taking of liquidity in the anticipation of a price move is not inherently bad. It is only bad if it degrades market efficiency (for example, by adding instability). An aggressive order that anticipates a price move due to an existing market inefficiency (for example, a sudden over-reaction to a report) benefits the market by speeding price discovery and adding stability.

As to your question of how an aggressive HFT strategy could benefit Vanguard, consider that if Vanguard places a passive order, it is because Vanguard hopes to attract an aggressive matching order. If they are unable to attract one within their time requirement, they will likely need to change their order to a less-profitable price. Their time requirement could be quite short during times of great volatility. An HFT strategy able to more-quickly recognize that Vanguard's original price was attractive would save Vanguard the cost of a price change. This benefit can be particularly large during significant market stress when participants are forced to liquidate assets in order to manage risk.

[hendzen]

The aggressive liquidity taking strategies cause wider spreads and shallower books as liquidity providers are forced to quote wider and smaller to avoid those adversely selected orders. This essentially is a small tax (or rent) collected from all other market participants.

[1e-9]

That is a common viewpoint, but one I strongly disagree with. I exclude illegal disruptive orders, since those are addressed by market reg disciplinary action. An aggressing order that provides new information to the market is not harmful. On the contrary, it makes the market more efficient by definition. If a market maker has to widen their spreads or lighten their liquidity, it is a sign that they are doing a worse job than someone else of determining market price (again, barring illegal activity). If a market maker is doing a good job, then they should be thrilled to have anyone take their passive orders all day long, because it will result in greater profit for the market maker.

[gruez]

>The aggressive liquidity taking strategies cause wider spreads and shallower books as liquidity providers are forced to quote wider and smaller to avoid those adversely selected orders

Is there evidence for this?

[8bitsout]

I think that this is common knowledge in market microstructure, but I've read about this specific relationship between market makers and adverse selection in the book, "Trades, Quotes and Prices".