Free lunches? Not at all. They’re a part of the trading eco-system, just as long-investors are. They provide liquidity into the market just by their presence and, yes, they take a little whether money is moving in, or moving out. If anyone is looking for a free lunch, it seems it would be you. You’d like to buy or sell, and without the people in between you and the trade counter-party to be compensated for the service they provide. HFT’s make sure your trade is filled nearly instantaneously, at a price you’re apparently happy to have (else, why did you trade at all?).
In the pre-HFT days, the “tax” was 10 times worse, as “market makers” only let you buy at the ask, and sell at the bid, and they kept the spreads a mile wide. They’d pocket the difference. Until ECN’s, you couldn’t really see depth-of-market, so even small trades could move a market as some crook-in-a-suit sniffed your intention, and pulled away their bid, so you’d have to pay even more.
My point is that you should have an idea of what you’re willing to pay for your investment. It’s either a good deal at a given price, or it’s not. If it’s not, then don’t do it. No one is holding a gun to your head and forcing you to buy anything, let alone line the pockets of a HFT. But if you want to buy a stock, some broker(s), market-makers, or HFT is going to nick you a bit - same as always.
Where HFT is dangerous is that they will immediately sniff-out an imbalance, and pull all their bids and offers, and stand back while the market goes nuts. In the pre-HFT days, one of the responsibilities of the market makers was to maintain an orderly market, and they were required to maintain a 2-sided book at all times (posting both bids and offers), sometimes (though rarely) getting the short-end of the stick. There is no such requirement for HFT’s, though it’s been discussed. Today, if the market gets spooked, they can stand back and watch chaos ensue.
At the end of the day, HFT’s are doing ALMOST exactly the same thing as the suits that came before them, only the amount they take on any given trade is infinitely smaller than what it was before they were around. This is better, no?
Is it perfect? No. Do they make a ton of money? Yes. Is it better than the old model? 99.9% of the time, yes.
Your entire premise rests on the idea that the price of trading would not have otherwise gone down and the spreads would have stayed larger.
You conflate correlation with causation. The internet made online trading accessible to far more people and online discount brokerages started competing for this new market. Occam’s razor would guide us to that being the cause for lower costs and tighter spreads. HFT is an unnecessary complication of the hypothesis.
Doesn’t mean I’m right and you’re wrong, but the simplest explanation is most often correct.
As for free lunches, your logic would indicate that laws against insider trading are unnecessary, as those traders would otherwise be helping securities to reach the proper price point more efficiently. So I guess we’re all enjoying free lunches compliments of Martha Stewart and Jeff Skilling.