What if the only participants were mutual funds and individual traders with no significant market microstructure strategies. Half of all orders would still be resting orders, the other half would hit the bid/offer in some way. Sometimes you'd lose more due to this, sometimes you'd make more. But it would be a "fair" coin.
Let's say on average it was $0.01 per dollar. As soon as someone entered the market with some microstructure expertise and strategy, everyone but the microstructure guy starts making (say) $0.005 half the time and losing $0.006 the other half.
Reducing some of the randomness and providing more consistency is certainly worth something; you can imagine an example where it was +/- $0.50 per dollar reduced to +$.005, - $.006, but note (assuming the same dollar volume) that the HFT guy would still be making the same amount of money as in the previous example, where he was providing much less value. I.e. the cost that HFT commands isn't strongly tied to the value it provides. This is without even delving into the latency-arbitrage arms race cluster fuck.
> What if the only participants were mutual funds and individual traders with no significant market microstructure strategies. Half of all orders would still be resting orders, the other half would hit the bid/offer in some way.
No it wouldn't. Unless you make some really odd assumptions (like the traders are monkeys), you could still have tons of limit orders and NO executions. That's what happens to iliquid stocks.
Let's say on average it was $0.01 per dollar. As soon as someone entered the market with some microstructure expertise and strategy, everyone but the microstructure guy starts making (say) $0.005 half the time and losing $0.006 the other half.
Reducing some of the randomness and providing more consistency is certainly worth something; you can imagine an example where it was +/- $0.50 per dollar reduced to +$.005, - $.006, but note (assuming the same dollar volume) that the HFT guy would still be making the same amount of money as in the previous example, where he was providing much less value. I.e. the cost that HFT commands isn't strongly tied to the value it provides. This is without even delving into the latency-arbitrage arms race cluster fuck.