Liquidity is a product like a hamburger is a product. Some firms expose themselves to the ability to sell liquidity for the same reason that other firms expose themselves to the ability to sell hamburgers. They think they can make money doing that.

Liquidity is unlike hamburgers in that there is a risk profile associated with it if you sell it to anyone who wants it. Adverse selection happens as detailed elsewhere; you lose money on their custom, potentially a lot of money relative to the margin on your product.

Certain buyers of liquidity are, like essentially all buyers of hamburgers, functionally riskless. You can profitably sell your product to them at a positive margin all day long, at virtually any quantity they could demand.

Payment for order flow is setting up a liquidity stand in a place where you structurally only get the non-risky customers. That liquidity stand is, like a hamburger shop, a cash machine, and justifies CapEx and OpEx to run. Part of the OpEx is paying your landlord for prominent placement of your liquidity stand in front of willing customers who are buying that sweet, sweet liquidity you're selling.

The price of liquidity changes moment-to-moment based on market conditions but is effectively standardized by law nationwide (NBBO). You are not overcharging your customers for liquidity; they pay the same price literally anyone in the country buying it in that instant does and you can, at your option, discount it further to reward them for buying it from you.

You are making superior margins on their custom because you don't inevitably lose lots of money by being in the liquidity business. The liquidity stand down the street is doing the same thing; your vicious competition against each other has caused the prices for your product to crater, to the enduring joy of the people who line up daily to buy your liquidity.

You might also think about it as the difference between opening up a cafe with unlimited free refills in San Francisco versus doing the same thing in exurban Utah.

You don't want the information. You want the order, so that you can be the other side of the trade. As long as the order arrival isn't too correlated with price movements, the market maker can buy a little above the bid price and sell a little below the ask price and make some fraction of a cent on each share, on average.

It's called adverse selection. You don't want to be on the other side of an order from an informed trader, because the market is moving against you in the short run. In the longer run, if the big fund is more often correct than not, then you are also more likely to have made a losing trade. HFTs care mostly about the effect on the market today, so they probably don't care whether the information is correct or not, they just want to get out of the way of big moves.

That's super interesting