With thousands of hedge fund PhDs all trying their damndest to exploit the market, adding delay will change the game but not eliminate it.
Only by when the market is efficient (in the technical economic sense) is it non-exploitable by smart guys. Efficient markets require all players to be rational, so not in this world.
They fulfill different functions. Low trading delays make certain the difference between buying and selling price is low, and reduces differences in price between marketplaces. Both very good for people doing long term investments.
Not all markets are deterministic, in some there is some level of jitter so fastest guy doesn't always win anyway.
Some markets also take steps to prevent the speed game too in how they define the rules.
While for obvious big moves it might be all about latency, most events are more about the quality of your pricing, incorporating correlated information, edge requirement and risk management that decides what you go for and what you don't, and for those smarter trades you usually have microseconds to spare.
Tomato, tomato. They're trying to make markets quicker than anyone else which requires a split-second understanding of directional trends in the spread, i.e., momentum.
A delay of 350 microseconds may very well make the market less turbulent and reduce the prevalence of "flash" crashes. Though the method of implementing the delay might not succeed, a forced delay would alleviate the arms race to lower latency algorithms. Lower latency means fewer computations and less memory, which means the strategy space is smaller. With enough players crowded into a small strategy space, the market becomes more frothy as periodically too many players collide on the same strategy.
Placing a lower limit on latency allows a better balance between algorithmic complexity and latency. The strategy space will be larger and hopefully will be large enough that there's room for most everyone to try different strategies, making the market calmer.
Unfortunately, IEX's proposed implementation of a delay is probably not as good as simply changing the precision of the exchange's clocks. If the exchange decided it would measure time only to the nearest second and orders occurring at the same second would be processed in random order, I expect that would be a better solution. Adding some randomness to the processing order at the 100s of milliseconds scale would go a long way to reducing front-running and overly simplistic momentum strategies. The latter are the main cause of market turbulence.
Your statement rests on the assumption that taking a week to make trades where there is a non-market-maker buyer is worse because the market "might" move down. The market "might" also move up (and if it's true that the market moves up over time, that's more likely). I don't think you've made a strong argument. What you're calling efficiency is actually expedience, because more work must be expended to achieve the same result, but the work happens in a shorter time-frame.
I think none of these arguments are very good against the idea of one-auction-a-second.
1) Liquidity is good, but remember who it is for. Uninformed traders, who want possession of the asset itself, will not care about a one-second delay because one second is too small an amount of time in human terms. Being able to trade a fraction of a second earlier is of no benefit. Being able to trade quickly on human timescales is the great benefit of algorithmic trading.
Informed traders, such as market makers, even market-making algorithms, also shouldn't care about a one-second delay. Their contribution to the market is the price. If you are a very good market maker, and you can quote prices better than anyone else in the market, your prices will be the better ones anyway, regardless of how the market is structured. And the profits are the market's rewards for quoting good prices, not trading quickly.
I would say the general idea is that liquidity providers and liquidity consumers compete, above all, on the price, and a one-second delay does nothing to hurt their incentives.
2) Again, I think it's quite obvious that on human timescales, on which actual economic decisions are made, there is no benefit to information arriving just a fraction earlier than it would otherwise. If you think of a market's purpose as revealing the price of an asset, it really shouldn't matter if the price is revealed 1ms earlier. What matters is that it is revealed at all, and revealed correctly with as many market participants as possible.
3) Because arbitrage becomes better when it contributes information to the market, not when it contributes information to the market 1ms earlier than another arbitrageur.
I think your points are completely valid arguments for algorithmic trading. Algorithms providing market participants with better prices than humans are indeed better for everyone. But for high-frequency trading, with the emphasis on high-frequency, I don't think this is very convincing.
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