>How could the economic effect be the same?

If a value trader goes and does a lot of good research on a company and then executes smart trades based upon that research they will make a profit. All well and good.

If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and their broker front runs them, a substantial portion of their profits are handed over to the broker. Not good. Value trader may not bother doing all that research in future (market for lemons; equity market becomes ever more disconnected from the real world). Broker parasitically extracted the value of value trader's real world research from them.

If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and an HFT detects the trade they're putting through and trades ahead of them using their superior speed, a substantial portion of their profits are, likewise, handed over to the HFT. Not good. Value trade probably won't bother doing all that research in future (market for lemons).

Front running is both a principal/agent problem and a market for lemons problem.

I believe the claim is that David Einhorn, Steve Cohen and other super rich hedge fund managers are providing incredibly valuable information discovery services to the markets. By by forcing them to suffer the price impact of their trades, we then reduce the incentive of such people to provide more information discovery.

tl;dr; Joe 401k should pay more for his retirement savings because by indexing, he's freeloading on the valuable labor provided by prop traders. HFT is bad because it makes this freeloading cheaper.

(Weird to hear argument lionizing hedge fund managers and calling out workers as freeloaders coming from left wing types.)

I'm not sure I understand the superpower you've just assigned HFTs. If a value trader does a ton of research and decides to adjust their position in a stock, exactly what is it that an HFT can do to capture "a substantial portion of their profits"?

The HFT can afford to provide a tight spread to Joe 401k, who typically buys at most 1 lot at a time. He can afford to do this because when there is a large surge of demand, he has the ability to rapidly reprice his orders.

I describe the process in a bit more detail here: https://www.chrisstucchio.com/blog/2014/fervent_defense_of_f...

This enables market makers to price discriminate between Joe 401k (who pays less) and David Einhorn (who pays more).

Good question!