[danbruc]

While I get the general idea of liquidity I really can't get my head around how it is supposed to work out in practice, especially in HFT. So let me make the question a bit more concrete.

A very illiquid market, I want to buy for $9, somebody else wants to sell for $10, nothing else. And now? How does HFT help? How does a traditional market maker help? He buys for $10 and sells for $9 and then somehow recovers the loss?

(Further down tptacek posted a great analogy. https://news.ycombinator.com/item?id=7853500)

[qrybam]

Market makers are not charities, they're there to provide a baseline for markets that don't have that many orders available (liquidity). This liquidity allows people to enter and exit positions more readily, encouraging real entrants to start trading the once quiet market.

People are more likely to trade if they feel a lower risk of being stuck in a 'bad' position.

Many times, exchanges actually pay market makers to provide liquidity to try and kickstart a particular market.

[maxerickson]

The market maker might have open orders to buy at $9.25 and sell at $9.75.

So you and the seller see better offers than if they didn't exist, even if those offers aren't good enough to get you to trade.