I’ve yet to see a good argument that they are high. HFT is taken to mean many things, but let’s (for now) focus on high-speed arbitrage and near-arbitrage.
Let’s say the market for coconuts in Thailand reacts somewhat slowly, and the market for coconut derivatives in Singapore allows for quicker trading. A storm comes to Thailand, the two coconut prices split, and a number of traders rush in to take advantage of the price discrepancy. (Of course since the Thai market is slow and less liquid, this won’t be perfect arbitrage.)
If ten traders have more or less the same speed (and quality) of trading technology, the returns to rushing would appear to be pretty small. At most, the $$ invested in speed will rise to equal the size of the available p x q discrepancy. That’s basically the same result you get with slower trading technologies. Call it waste, or not, but I don’t see that any new problem has arisen here. There is some waste, bounded by the p x q discrepancy, whether people compete over speed at higher speeds or lower speeds.
If one trader has dominant speed, that seems to also limit the costs of running after the arbitrage profits. Rent exhaustion will be far from complete.
Alternatively, imagine a leapfrog model. The quickest firm gets to be clear leader for a year, but by the time that year is up they are leapfrogged by a new and speedier technology, and then there is a new leader. It still seems to me that the investments in the new speed technologies are bounded by the p x q discrepancies, as they were in slower times.
Keep in mind, if HFT yields profits, there are also incentives to improve the trading technologies in the slower of the two coconut markets. Those incentives will limit the profits from HFT and thus the resources invested in HFT.
I understand full well that this discussion considers only a few relevant factors. Nonetheless I don’t see that the critics are imposing even this much structure on the problem. I don’t see why “at higher speed” makes the rent exhaustion problem from price arbitrage more costly in social terms. I don’t see a good theoretical or empirical argument on the table, much less a verified argument.
You also might think that more volatile intra-day asset prices are a cost of HFT. Hold off on that for now, I’ll consider it in another post.