What I'm saying is that high frequency market makers are only need in very small numbers (if even that). When 2/3 of a market's volume is HFT position shuffling, you're not "improving liquidity" in a way that's meaningful or useful to anyone.
You can argue that /liquidity/ is fine if you have a small number of market-makers but price discovery (otherwise known as "value") is something altogether different.
To put it another way, I can get all the $8 hotdogs and $12 beers at Yankee stadium I like. The liquidity is fine but the VALUE isn't.
2) Just as no one is forced to do their weekly shopping at Yankee stadium, investors can choose which exchange to submit their orders to. Exchanges with shoddy market makers would lose customers.
2) I dont see any fundamental difference between multiple exchanges each with a dominant market marker and multiple market makers within a single exchange. In practical matters, retail investors dont select their exchange, their broker does.
See the fallacy here?
Also, HFT's are present only in very small numbers (relative to the size of the financial industry in general).
When scads of people were writing CDO's and swaps and other clearly garbage papers in 2007, they probably used your logic to justify their recklessness, and here we are.
You mean the minor event precipitated by a fat fingered human and corrected in an hour or so by HFTs?
If you have a plausible disaster scenario involving HFT's, state it. So far, near as I can tell, your argument is merely "omfg finance stuff I don't understand it might destroy the world!"
What is my disaster scenario? Do I really need to explain why extreme volatility can vaporize investor confidence in a market? If an event like this was caused by one market action, you can even imagine malevolent investors trying to intentionally trigger a crash or a mini-crash (holding a short position on the side so that they profit). If enough people are able to do this with regularity, the market turns into /b/ and becomes worthless for traditional users. I won't pretend to have enough imagination to see all the ways this could go wrong; we can leave it up to Wall Street to make it a reality. It would seem like common sense, however, that if neither investors nor regulators have a firm grip on the steering wheel (and maybe that's the best way for the economy to run, who am I to say?), we would be better off not putting the market in cruise control at 600mph without carefully considering all the ramifications.
[1] http://online.wsj.com/article/SB1000142405274870402930457552...
[2] http://www.bloomberg.com/news/2010-10-01/automatic-trade-of-...
[3] http://www.nytimes.com/2010/10/02/business/02flash.html?_r=1...
[4] http://www.reuters.com/article/2010/10/01/financial-regulati...
[5] http://online.wsj.com/article/SB1000142405274870432280457630...