But there's still a loser there: the older transportation or retail providers who can no longer sustain their high profit margins. The Pennsylvania Railroad took in profits that used to belong to Erie Canal shippers. Amazon got rich by collecting money that used to go to Barnes & Noble at brick-and-mortar retail. So from where did the profits or money come that make up the HFTs' profit?

From the other responses, it sounds like the real answer is salami slices from lots of other market participants. A large mutual fund buyer pays a slightly worse price because the HFT jumped in ahead of them to arbitrage between the selling market maker and this buyer. So the HFT's profit comes out of the mutual fund's capital. The loss would show up as tracking error for an index fund, for example.

I don't think that's correct. We have always had market makers: people who trade purely for profit. They grab stocks in anticipation that others will want them at a higher price. So, if I own stock, and you own stock, instead of the stock going straight from me to you, it's more likely that there will be a market-maker inbetween us.

The benefit of this is that the chances are small that you and I will be trading at exactly the same time. So, I say "I want to sell this stock," and a market maker buys it. Later, you say "I want to buy that stock", and you buy it from the market maker. The market maker makes money on the profit of the sale. So, I may get a little less, and you may pay a little more. But, it means that when I wanted to sell, someone was there. And when you wanted to buy, someone was there. That's what people mean by liquidity.

So, back to HFT: the losers are the conventional market makers. The guys in the pit who used to shout-out buys and sells.

The economy is, thankfully, not a zero sum game. The profits the Pennsylvania Railroad 'took' from the Erie Canal shipper also allowed a cheaper and more flexible transport of goods for, say, a steel manufacturer in Pittsburg or a salt producer in Syracuse. The bulk of the IT industry is dedicated to making old processes more efficient, and therefore 'taking' profits from some middleman.

The HFT's profits do come from a large mutual fund, but then that large mutual fund can lower it's risk because it can quickly move from one position to another because it can expect a HFT to buy whatever it is selling. Risk has a price (ask an insurance company) and reducing it adds value to the economy.

Perhaps HFT was very lucrative for a while, but competition has naturally squeezed the margins out, but the markets has all the benefits of having HFT around.

And to take your example a step further, the lower risk of a large mutual fund being unable to offload assets quickly enough could result it allocating more funds to an IPO used to raise funds for a company that actually makes stuff.

The caveats are (i) there are diminishing returns to what trades add in terms of wealth because reducing time and cost of offloading stock a further 15 milliseconds and 0.001% clearly isn't going to radically alter the risks of investing in productive enterprises as reducing the time and cost of selling stock by an hour and 5% was (ii) certain trading behaviours can actually scare real investors away.

Buyers and sellers of stock face a spread anyway. Quants make the spread smaller by arbitraging it. They are now so good at it that the profits are down to 20% from what they were a few years ago. Mutual funds and other investors can now thus buy their stock with smaller spread, i.e. smaller 'salami slice' to give up.