> HFTs and other market makers are time- and risk-shifting supply & demand. In a functioning market, you can always find someone else to take the other side of the trade if you wait long enough, but you may not be able to find them now. Particularly in market panics, where all the buyers tend to disappear at once.
Time shifting risk would be perfectly fine if market makers had to play by the same rules as everyone else in the market, but they don't. They get to ignore certain rules, which results in distorted prices because they can effectively accept infinite risk over an infinite length of time.
Let's say there's suddenly a run-up of $WEN and I, as a retail investor, want to short it because I think the price will surely come back down eventually. If it continues to go up, ultimately I get margin called and have a very short period of time to produce a lot of money to keep that trade open, otherwise I'm liquidated. There is a (risk * time) maximum before I, the retail investor, ultimately go out of business.
Market makers are exempt from this. They are legally permitted to short stock by conjuring phantom shares from thin air without having to locate borrows to satiate the buying demand during the run-up and wait effectively an infinite amount of time to repurchase the shares. There is no limit to their (risk * time) budget. Better yet, when the underlying company ultimately goes bankrupt from the stock being cellar boxed into the ground, the market maker can just wrap up all the worthless, sub-penny shares into a zombie holding company which lives forever, so they have never close the trade and actually pay taxes on the ill-gotten gains. Meanwhile, nobody seems to bat an eye at tens of billions of "securities sold, not yet purchased" on the market maker's balance sheet, because hey, as long as the SEC remains a wet noodle thanks to regulatory capture, they'll never get charged with fraud and the music keeps playing.
It's a system that has been deliberately structured to screw over average retail investors and concentrate wealth behind a few large market making firms, which incredulously all have their own hedge funds (which is somehow not seen as a hilariously brazen conflict of interest). Whenever anyone asks why all this complexity is necessary, the "We provide liquidity, so you can trade right now, for free!" line is trotted out and they hope you go away so they can continue running their shell game. Our markets have become addicted to this fake liquidity, which is ultimately backed by an infinitely expanding risk balloon. As long as the balloon never pops, the game is still on.