If you took away exchange colocation, you'd just have a boom in property values around the exchange as automated traders would still try to get on the shortest network path to the exchange. Exchange colocation is actually a way to level that playing field. Everyone who is colocated has exactly the same network delay to the matching engine as everyone else who is colocated.
Millions of Americans invest a large percentage of their retirement money in 401ks because they believe that the US Stock Market is a relatively good place to make long term investments.
When we see examples of people skimming money off of the market it makes us lose faith in the market. That is why this practice should be banned.
Which practice, exactly? You described one party having a faster connection than another. That's not exactly something you can "ban". Lewis even acknowledged that relative inequality of this nature will always exist.
How do you "ban" a fast connection? How do you even define a fast(er) connection?
If I'm the CFO of company X I have an unfair advantage when it comes to making trades minutes before the quarterly results are release for my company.
This would be very similar to insider trading in that there is going to be a grey area where it would be hard to prove that the intent was to undercut someone else but having the regulation there would at least curtail this practice somewhat.
It is Heisenberg morality. Once you look at it, there is nothing wrong with it. They are just updating prices to reflect demand, but at the same time they are extracting money from the market just because their data center is physically closer to the exchange.
Computers have made this process extremely fast and efficient to the benefit of nearly every market participant.