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.
You’re guilty of what you accuse me of ...
Your premise is that the costs, spreads, and speeds would have dropped without HFT’s. I was in the business (not the HFT side), and I know this is not true. Much of the cost of trading is fixed in nature, and very high. Certainly, some of the spend was only there and done to accommodate the HFT’s “need for speed” (NYSE Mahwah data-center, for example, or NASDAQ selling data-center rack-space to trading firms (read: HFT’s), where the price of rack-space went up the closer your rack was to the matching engine rack). I think this should have been banned too - everyone should have level-field access to the exchanges. But, if my algo is better than yours, or faster than yours, or my trade idea is better than yours, that shouldn’t be punished or regulated.
The higher volumes of shares and trades gave an exponentially larger base over which to spread the high fixed costs. Without these larger volumes, the costs embedded in every trade would have been higher - and by more than the HFT’s costs add (IMHO).
And I certainly don’t agree that insider trading is OK. To the contrary - the markets can and should price efficiently when all PUBLICLY available information is known to the most market participants. Insider trading allows a participant to trade off of info that their counter-party doesn’t know and can’t know, which should be punished severely. That said, if they don’t know out of ignorance - well, that’s capitalism.