That's pretty simple to answer. The smaller the spread, the less going into the pocket of middlemen. Which is where we are now. Less going into the pockets of middlemen than ever before.

>And are these benefits worth the massive amount of wealth extraction

What "massive amount of wealth extraction"? Are you just making shit up?

> And are these benefits worth the massive amount of wealth extraction from the rest of us that HFTers are engaged in?

Unless you were a specialist market maker or pit trader on an exchange there hasn't been any "wealth extraction". Quite the opposite, HFT has taken a system built on being tall, having good connections, and understanding an arcane set of hand signals (not to mention very high fees) and replaced it with a ruthlessly efficient automated system based on being good at writing software and planning network setups (and brought the fees down with it).

For the vast majority of market participants HFT has been a massive upgrade over the old system and dramatically lowered the cost of trading.

The book "Flash Boys" by Michael Lewis chronicles the rise of HFT, and basically argues that it doesn't really provide that much of a benefit.

http://www.amazon.com/Flash-Boys-Michael-Lewis/dp/0393244660...

Middlemen have always existed in markets. The middlemen have changed, but as you rightly point out, they now take SIGNIFICANTLY LESS than they used to because competition has forced spreads down to next to nothing. You pick: pay a 0.30 spread on a NYSE listed stock or a 0.01. It's sort of a no-brainer.

The thing that most people seem to be upset about is that now market makers generally have few to no obligations to provide liquidity and they are drastically smarter than they used to be.

Ultimately, unless you are slinging enormous blocks, if you send a marketable order through a retail broker these days you are almost always going to get a better fill than the displayed market. Likewise, if you are a large trader you have to be more sophisticated about how you fill your orders, you can't just lift 100k shares even when 300k are displayed unless you do so with a semi-intelligent execution algo (note: these are everywhere these days, and not using one brings into question the trader/brokers abilities and whether they are even qualified to be in the market).

If HFT lets Vanguard lower their costs, the savings of which are passed on to their customers, that's more money in the retirement accounts of regular people.

I just got an email that the expense ratio of my Vanguard target date fund is going down, so costs were reduced somewhere.

The Chief Investment Officer at Vanguard, of VFINX fame and widely considered to be among the most trustworthy fund companies, stated that HFT had improved things for firms like theirs.

Index funds, or really anyone with long horizon investment objectives, are major benefactors of HFT. Note, "HFT" really means nothing in modern context, but regardless, what most mean are "Electronic Market Makers". Long horizon investors benefit directly from being able to access cheap and plentiful liquidity pretty much whenever they want to. Spreads are tighter because there is now significant competition to provide that liquidity.

By "fundamental view on the market", I mean those who have done research and know that the price of something is under- or over-valued. These are generally known as informed investors. When they decide some security/commodity/etc is mispriced, they will immediately put a lot of money into that idea, ideally (for them) before the market adapts. With HFT, the market adapts a lot quicker than before, which is better for general investors (who are uninformed investors) as they get a price that's closer to the real value.

Index funds don't have a view on specific securities. They don't perform research to try to get an edge. Instead, they believe that the market is generally efficient, the and they try to lower risk by diversifying across a large portfolio of somewhat related securities, and get a return that closely matches the overall market. As such, HFT helps them by givings them better bid-ask spreads and also providing prices that are closer to the actual value of an asset.

Note that those performing fundamental analysis and buying millions of dollars worth of assets aren't SOL. They just have to be smarter about how they execute.

The money they make comes from a premium the market's "officers" used to extract from the market's "customers". Market officers used to scalp dimes and quarters off the price of every share transacted by deliberately quoting wide spreads. Automated traders shrunk those spreads, so much so that they're pushing the boundary of a single penny.

The great thing about this is, automated traders don't capture the value they're creating by bidding the spread down: the buy-side does! Automated traders are getting paid to liberate money that used to go to fees for sell-side middle-men.

The sell-side is, as you can read subtextually from _Flash Boys_, pretty furious about this.

"The money they make has to come from somewhere" - yes, it comes from willing participants engaging in voluntary transactions. "May impose exernalities". That's pretty much true of just about anything, but good evidence is necessary to consider this statement useful

Depends on the nation: http://en.wikipedia.org/wiki/Everything_which_is_not_forbidd...

A single exchange brings all traders together reducing search and monitoring costs and thereby reducing trading costs. The single exchange as a monopoly can extract rents from members and has little incentive to improve stuff, e.g. infrastructure. So the tension is between the monopoly power and the liquidity externality arrising from bringing traders together to the same place. The market makers do not necessarily have a monopoly, they can compete against each other, but face monopoly level fees, potentially. (This is my amateur economic analysis, but I think basically this is what economists think.) A fragmented market increases competition on fees and infrastructure, but traders face search, monitoring costs and the cost of dealing with HFTs.

I like asking programmers to think about the CAP theorem when they consider this problem.