Suppose I'm a speculator willing to pay $0.03/share for liquidity. It's valuable for someone (I don't care who) to provide that liquidity.
If HFTs were all 100ms slower, I wouldn't care. But if HFT 1 is 100ms slower than HFT 2, then HFT2 will capture $0.03/share and HFT 1 captures nothing. It's a wasteful arms race. It's also fixable simply by eliminating the subpenny rule.
It's not that it would eliminate it, but it would make the margins to due pure latency arbitrage so small as to make it not worthwhile (in theory anyway).
That said, there is and always will be an advantage to players that can respond more nimbly to changing market conditions (news being one input to this) and there is no inherent problem with that (and there may be lots of positives to the market as a whole).
Have you considered this post in light of the inverted exchanges BYX, EDGA, and BX? You can effectively make your liquidity cheaper by posting to an exchange with an inverted fee schedule (pay to add, rebate when you take), but we still see the "latency arms race" at the traditional exchanges.
Moving the decimal point to the right just increases by 10x the volume necessary to create the same profit. I think a likely result would be massive consolidation to a couple big companies, who would then compete once again on latency but at much higher volumes.
If HFTs were all 100ms slower, I wouldn't care. But if HFT 1 is 100ms slower than HFT 2, then HFT2 will capture $0.03/share and HFT 1 captures nothing. It's a wasteful arms race. It's also fixable simply by eliminating the subpenny rule.
http://www.chrisstucchio.com/blog/2012/hft_whats_broken.html