Earlier quoted context omitted.
How do you pick the timeframe? Seconds are still too fast for humans. Minutes would be too fast for people who are not professional traders, hours would be too fast for people who can't be near a computer all day. There is always a locality advantage in the market, this has been true as long as there have been markets, and it will be true forever. Why do we as market participants care? The other problem with your sce…
> The other problem with your scenario is that you make market making more risky. The problem with the current scenario is that it makes market making more expensive, as it requires a lot of technological investment into the microsecond arms race. This means the market makers must pull in more revenue from their trading to cover these expenses, before they even get to thinking about making a profit. This cascades to…
So what actually ends up happening in a market with multiple competitive market makers? To make money, a market maker needs to trade a lot of volume. The only way to trade a lot of volume is to put up the most aggressive (worse for the market maker, better for end users) prices at any time. Market makers can only do this by charging a smaller spread than their competitors. They can only charge a smaller spread by either reducing their margins or getting smarter at deciding when to be in or out of the market, usually a combination of both. The end result is extremely tight markets that react to information very quickly (i.e. cheap to trade and very efficient).
Competition keeps markets honest. If you had one very fast guy, he would clean up, but when you have a dozen guys who are roughly equally fast, they all compete one another down to barely making profit above their cost of doing business. Only the most efficient can survive. If anything, we want more HFT by removing barriers to entry rather than creating a lot of regulations that would ironically help incumbents by killing off weaker competitors.