I feel there must be some ideal level of liquidity, which is after all subject to laws of supply and demand like everything else. Cannot an oversupply of liquidity result in fiscal inflation, as opposed to the monetarist kind? I'm reminded of the Asian financial crisis during the 1990s, when there was a ton of money flowinginto newly-developing markets int eh Asian region, but then a spasm of political uncertainty suddenly led to a catastrophic withdrawal.

Echoing one of the other posters here, I don't feel that anyone at this firm or the firm itself is acting in bad faith, but assuming this mathematical demonstration is correct and it's virtually impossible for Virtu to lose money other than by abandoning its winning strategy, does this not invite an arms race and a stampede of eager traders hoping to also get rich by picking up pennies from in front of steamrollers?

I don't want to say you're wrong, but to question the applicable scope of your premise. Virtu itself may not be big enough to cause market instability, but 100 firms doing the same thing might.