Put it another way, if the number of HFT trades were suddenly cut in half, what 1st order impacts would be felt by people outside those markets? The heart of the "but we're providing liquidity" argument is that this is a service provided that has real value outside the market. If that's not true the particular argument falls apart, doesn't it?

it probably is because of distortions in the flow of money

> Put it another way, if the number of HFT trades were suddenly cut in half, what 1st order impacts would be felt by people outside those markets?

it would probably result in capital markets taking longer to account for changes in the market/world such as shortages. Then the capital markets that weren't subject to the restriction would be more competitive as a whole. Depending on the specifics, it might open the door to people with relevant information (who weren't hf traders) to begin to make some of those trades.

> The heart of the "but we're providing liquidity" argument is that this is a service provided that has real value outside the market. If that's not true the particular argument falls apart, doesn't it?

I don't use the liquidity form of the argument because I think it focuses on the wrong things. Capital markets affect the rest of the markets by optimizing the creation and maintenance of capital. All consumer goods rely on capital. So policies that make the capital markets less efficient would have broad downstream effect in commodities markets, essentially there would be in aggregate fewer goods.