Generally, HFT firms end up decreasing volatility. They price stock more accurately, which makes them money and decreases volatility. If they were increasing volatility, they would make infinite money, since the source of their profit is the volatility.
The main scenario where HFT firms increase volatility is when their algorithms break (either due to a programming error, or because they cease to accurately model the market due to a change in market conditions). In that case, the misfiring algorithm will increase the market volatility, and lose the HFT firm money.
You absolutely right that firms without co-located data centers are at a disadvantage. Thankfully, this only really matters if you are trying to compete with HFT firms. So it's not a big issue for people who trade on a longer time scales. The HFT firms do make some money off of these long term investors, and in exchange provide increased liquidity, decreased spreads, and decreased volatility. (if the HFT firms weren't offering the best prices for the stocks, then the long term investors wouldn't be buying from them)
Great, could you explain to me as a retail investor without direct access to the exchanges how to place an ALO order and to buy or sell without enriching HFT shops? (Hint: you can't.)
With a retail broker it's moot - they charge you a flat $8/trade regardless of whether you add or remove liquidity. You never collect rebates or pay to take liquidity.
You can still choose not to cross the spread with a retail broker. Just place limit orders on the right side of the spread.
Most retail traders actually get slightly (insignificantly) better prices for liquidity taking orders through price improvement at the wholesaler. Retail traders can also send post-only orders and participate in exchange the rebate/fee program on Interactive Brokers.
The main scenario where HFT firms increase volatility is when their algorithms break (either due to a programming error, or because they cease to accurately model the market due to a change in market conditions). In that case, the misfiring algorithm will increase the market volatility, and lose the HFT firm money.
You absolutely right that firms without co-located data centers are at a disadvantage. Thankfully, this only really matters if you are trying to compete with HFT firms. So it's not a big issue for people who trade on a longer time scales. The HFT firms do make some money off of these long term investors, and in exchange provide increased liquidity, decreased spreads, and decreased volatility. (if the HFT firms weren't offering the best prices for the stocks, then the long term investors wouldn't be buying from them)