But your examples support relative gain, not absolute gain. Even after HFT, there will be some investors who get rid of the hot potato before others (or the opposite acquire an attractive stock). It's just that the one's who are the first to trade will have to pay more resources to access powerful technology. Situations like these arise in many non-cooperative games, like an arms race, where an improved technology leads to increased loss to both sides but is unavoidable unless there is a scope for cooperation via a treaty.
Furthermore, this leads to a systematic bias in favour of large investors and hedge funds who are the ones with resources sufficient to win the arms race.
Note, that after HFT, the market value synchronizes faster by a short interval of time. Maybe there is an argument that this leads to a large absolute gain in some form by the way it affects investors decisions, but I dont see how it does.
Does it make a difference if you sell at 12.01pm after a competitor's product announcement rather than 1pm? Right now, yes. Do I think it should? No.
The reason prices swing so quickly is because trades happen so quickly. If trading was slowed down, prices would not swing as quickly. The current situation reinforces a vicious cycle where the fastest trader has an advantage in the market.
Public share prices is a measure of how much the company is worth to people that buy shares not of how much value the company creates by selling their products. PepsiCo should be valued on how well they sell soft drink, not millisecond-by-millisecond analysis of unrelated issues.
Lets talk about PepsiCo. The weather service detects a new hurricane forming off the coast of Florida, sending orange juice futures up. At some discrete point in time, the weather forecast computer model spits out its results, and that information is on its way to becoming public, and there's going to be a fast change in the price of oranges, and hence the value of PepsiCo.
Here is an article, describing just such an event:
" Orange juice futures hit a three-year high on Tuesday as speculators eyed the development of a Caribbean storm that meteorologists said had a chance of moving towards Florida. Orange juice is a $20bn industry with prices affecting farmers in Florida and Brazil, processors, trading houses and bottlers such as Coca-Cola and PepsiCo. " http://www.ft.com/intl/cms/s/0/1831a65c-c5a8-11df-ab48-00144...
Now, lets look at Google. Lets say Google does better in a more buoyant economy, because they get more ads (maybe the opposite happens in real life; but its just an example). And the drop in the price of oil has given me information that others think the economy is tanking. Hasn't the 'actual business value' of Google changed, in a very real sense? And quickly?
You might argue, if you believed in a deterministic universe, that the value of Google hasn't changed - the economy was always going to tank, because the universe only plays out one way. But that's irrelevant, because we don't have access to such a model of the universe. What we have to make decisions on is the information we have access to, which can change suddenly, and which the markets do a good job of aggregating.
I'm not trying to argue for front running the trades in the market or anything like that. I'm just trying to argue that business value can change rapidly.
I think the reason prices change so quickly is because aggregated belief about the value of companies changes so quickly, and because our markets allow that change in aggregated belief to be quickly expressed.
If you slowed trading down, so that it happened hourly, as you might propose, what this would mean is that the price of PepsiCo is essentially out-of-date for an hour. I could no longer look at the price of PepsiCo on the market, and assume it was doing a reasonable job of aggregating the public information about the future prospects of PepsiCo - I'd have to imagine it was an hour out of date. This would probably make the market less useful.
I can't see the same argument extending credibly to milliseconds.
The markets have breaks in place to stop rapid crashes. The flash crash was caused by human placing a bad trade, quickly followed by the automated trading systems leaving the market.
Someone really has to make a much better case then this then pension funds being upset someone has detected their buy order and is driving up their purchase price.
Sudden events happen. You can think of dramatic events such as terrorist attacks or death of an important executive; but there's other information, such as the public announcement of a new product (e.g. 'Apple are making a new type of device!', perhaps rapidly followed by 'Google have just said they'll support it!') that also result in fast changes.
But, most importantly, the market price provides information that influences further decisions. Maybe I'm not an expert on oil prices, but I believe if it goes below $70 a barrel, its a signal that the world economy is slowing down, and I want to dump my Google stock, because I'm only willing to accept a certain level of risk in my personal investments.
The fact that I can see the price of the oil provides me with a signal (maybe noisy), derived from aggregated intelligence of other investors. This is a useful function.
Its completely legitimate to want to sell my Google stock in response to other market signals, and as quickly as possible, in response to the new information they provide.
The fundamental value of holding the Google stock, to me, has changed, fast, because of other information that's become available.
So fundamental business value can change fast, for a variety of reasons, and it can add value to be able to respond to quick changes quickly.