It is a common misconception that you have to have high capitalization to afford colocation. There are many firms providing shared colocation for monthly costs on the order of high end web hosting (though with the rise of cloud hosting web hosting is coming down rapidly in price).

As someone who works in HFT, you have hit the nail on the head about the real problem with it. It isn't front running, or instability, or unfair trading or any of that. It is simply that so many very smart people are working on it, instead of other more useful ventures. Of course, I feel the same way about data mining social networks.