Take out the arbitragers and all the other participants as a whole keep more money. Spreads may increase, but one party to the transactions always earns the spread and the other loses it, netting out to zero, rather than compensating latency arbitragers (and paying to generate waste heat in their datacenters) which nets out to less than zero.

There is some value to keeping things liquid, but that value isn't tied at all to the amount of money that arbitragers get compensated. Consider that whether the latency is 1ms or 5ms, the fastest arbitrager wins. But to bring things down to 1ms from 5ms may require 10X more expense and waste, lowering the compensation to the arbitrager. In a competitive enough environment they simply burn up all of the spreads into waste heat and redundant fiber infrastructure.