Mutual funds do buy HFT services in executing their long term investments...they do so by going to the open market, where HFT dominates. They pay HFT services by paying the typical 1 cent spread.

One of the greatest examples of how nothing nefarious is going on is from a large multi billion dollar hedge fund I used to work at. They have both an equity investment group, as well as a HFT equity liquidity providing platform. I worked on HFT, and knew the equity guys. They always wanted to execute with us in the open market. It was so much better than what they used to have to do.

Why would one of the most sophisticated equity investors in the world want to run an operation that "skims" from the other? Because that's not what HFT does, and of course they know that. They use their own product (their HFT system) to execute their own buy orders. If that's not a testimonial, I don't know what is.

There are just two parties per share. The HFT bought each share from one seller and immediately sold it to one buyer; their optimal holding time is two round trips to the exchange. If the seller and buyer were both in market within a fraction of a second of each other and the trade would have gone through anyway, the HFT isn't adding any liquidity but parasitically attacking a flaw in the way the exchange matches and clears trades.

What are you talking about? If a non HFT buyer/seller both want to buy/sell at 20, then they will go to the market and that will happen. In fact, that happens all the time.

This is precisely the point about HFT. If you are a seller, there isn't always a buyer. HFT is there when there ISN'T the other side. The scenario you described is absurd. How often do a buyer / seller want to interact within the same millisecond?

They can of course. HFT does nothing to stop that. Two people can trade in the open market with each other whenever they want. The reason most of the time HFT is involved is HFT gives the best price. That's why it's become so big. They provide the best price to their customer, not attacking some "flaw" in the exchange.

Part of what I am saying is that there isn't much room to do that. Take some publicly traded company and examine their order book. For any company with decent volume, the bid ask spread will likely be $0.01. For companies with less volume, buyers and sellers won't waltz into the market at the same second.

Here's an exciting company with a spread of $0.01 (at the moment anyway):

http://finance.yahoo.com/q/ecn?s=WEC+Order+Book

My selection criteria was to try to find a S&P 500 component that I wouldn't expect to be among the most highly traded S&P 500 components.