What about wash sales? That seems like a big threat to this model
Long term, you could imagine that our automation could buy and sell securities that are slightly different, so that you would get the full tax loss harvesting benefits.
If S&P 500 index funds and similarly broadly defined funds from each brokerage house are available and deemed "different enough", it could significantly increase the money moves available before encountering a "required" wash sale.
I'm not familiar with the behind the scenes aspects of it, but it feels like there may be a clever solution out there that could augment some of the liquidity concerns you mentioned if you could batch the transactions together.
E.g. Alice has $1,000, Bob has $1,000, and Charlie has $2,000. They all have a transaction on the same day. Alice and Bob were on $Illiquid_Fund_A, Charlie is in $Illiquid_Fund_B. Alice and Bob trade with Charlie and everyone goes about their day.