The floor trading on the NYSE had better prices continually throughout this period. For example, Proctor and Gamble never traded on the floor under about 5 points below the 2:30 price - when it dropped 6 times that amount on some of the electronic trading systems. Why? Because there were human specialist marker makers doing their job.
There has been an attempt to replace the tried and tested human methods of trading with purely electronic ones in the interest of speed and efficiency. And at normal levels of volume that works. But sometimes it just doesn't, and the old way is much, much better.
The current rules allow the electronic systems to ignore the best floor price in fast markets, trying to get trades executed as rapidly as possible instead of at the best price available. That is a mistake in a purely technological trade off, and Thursday showed why it is a mistake. A faster execution does not equal more liquidity.
I agree with your last two para’s completely.
I’d add this: the actions of the two HFT’s that pulled out of the market when it started going down proves that their arguments for being allowed inside access to the market are now proven false. When the market needed liquidity, they fled.
This begs the question “Why do we tolerate HFT’s, again?” Because their only supposed utility was to provide liquidity. If they don’t, then there’s no reason for their existence.