Except that even the Fed now admits that HFT's only add liquidity precisely when it's least beneficial (when nobody needs it) and reduces it when it's needed.

Don't buy into the HFT "adding liquidity" myth.

Yep. At risk of adding a "this" comment I've spent years reading on the subject, talking to some of our customers who are HFT, and generally just thinking and learning about it.

I still can't figured out a single value-add they bring to the table, much less to justify their insane compensation or the incredible technology budgets they carry. It's simply sad to me to see some of these brilliant minds (at least on the tech side where I interact) essentially engaged in ripping off fellow citizens at worst and rent-seeking at best.

Of course if you engage them, they will get all hand-wavy about "liquidity" - but I think it's striking that not a single person I've talked to has been able to distill the benefit they bring to society in a simple sentence or paragraph. It always ends with the "most people can't understand" which as I get older I've learned is a euphemism for either "I don't know" or "I don't want to tell you the truth".

Either way, so many billions of dollars taken from the economy and put into useless activity. Absolutely no one will be able to convince me we need millisecond-level liquidity for markets to function efficiently.

HFT don't provide liquidity for liquidity's sake. They make markets more efficient, i.e. closer to the "one true price" (not necessarily the fair price, because there's no way HFTs can outbid all the money collected in index/sovereign founds or printed by central banks). They also reduce the spreads. For an ordinary person, they improve the markets.

The complaint about "brilliant minds being wasted" rings true, but you could make the same complaint about all of finance, and even most of Silicon Valley focused on extracting rents by serving ads - both are ultimately zero-sum games where insiders profit at the loss of society.

I think the ultimate problem is, there are no real problems that smart people could work on and make a contribution (and earn a good living) - or at least I don't see any.

Yes, we can definitely argue about tax/cost vs. liquidity - as I mentioned in another comment, we could have different exchanges encourage different levels of liquidity (resulting in different costs of trading) - investors would then be able to choose what they prefer - liquidity or lower trading costs. To avoid adverse selection, companies could even do it on a per-stock basis (or the regulator could run per-stock experiments, and analyse the effects).

I don't know the details of HFTs in general, but to my understanding, what they do is arbitrage (orthogonal to liquidity) - basically, making sure that any simple patterns in the price are exploited (and thus reduced). Note, however, that HFTs themselves don't make money - the markets could be just as efficient if only HFTs would participate, and with any new piece of information (earnings release, news, movements of other prices) a new equilibrium would establish (best bid and best ask) without any trades happening. Trading either comes from (1) disagreement about the price - and the person who's right earns money, rightfully IMO (and if you don't want to lose money, just don't play), or (2) external circumstances (e.g. you want to buy a house => you need money => you sell your stocks), in which case HFTs are actually helping you (reducing the spread, and still earning money - e.g. a "stupid market maker" offers you 100 and then sells it for 101, earning 1, whereas the "smart HFT" offers you 100.01, and then sells it for 101, earning 0.99 - and you're better off as well).

This isn't the whole story, of course - there's probably a lot of illegal things going on (dark pools, front-running, order flow selling), and a lot of waste could be reduced (e.g. by regulators forcing HFTs to share/rent infrastructure and only compete on algorithms, or mandating everyone has the same delay to the exchange), but those are problems only if you let HFTs exist.

I think you have it the other way around: liquidity providers as a group make less money because of HFT, not more. Ordinary investors now pay less for liquidity than they used to because of HFT and the complaints are largely coming from traditional liquidity providers who were able to extract more for providing liquidity in the absence of competition from HFT. It is a zero-sum game but I think you're ignoring the presence of other rent-seeking players that HFT has now outcompeted.

Now things are a bit more complicated because HFT is a fairly broad term but this is true in a broad sense.