Human traders hold securities for more than fractions of a second. If I want to sell my shares of some low volume stock today and some other human investor wants to buy them next month, a third party who is willing to buy them from me today and sell them to the other buyer in a month is providing a useful service -- I get paid today, he gets the shares at a slight discount and makes a profit a month from now. That clearly doesn't apply when a high frequency trader buys shares and turns them around in fractions of a second.
>They don't "deserve" it any more or less than any other middle man.
A middle man deserves the profit he earns by providing value. What value is provided by a middle man engaged in naked arbitrage by taking advantage of an ephemeral information asymmetry?
The value provided by "middle men", be they robots or crooked traders in pits, is liquidity and price discovery. Trading allows people holding an instrument to unload it more quickly rather than waiting to convince themselves to take a bigger leap on pricing; it's what, in a simplifier Bohr-model kind of way of looking at stock trading, allows you to buy shares in a stock at a market price you can look up online as opposed to waiting for the stars to align. The faster the trading, the lower the spread, the smaller the leap sellers and buyers have to take.
It's worth noting again as always that before automated and program trading, spreads were higher, and the space in the spread between the bid and the ask was basically a license to steal.
Here's a good comment from awhile ago, including a cite to an accessible paper:
How can this be true consistent with HFT being profitable?
> The faster the trading, the lower the spread, the smaller the leap sellers and buyers have to take.
That's the theory. The issue is that when you get into sub-millisecond trades, you're so far into diminishing returns that the profits the HFTers are taking exceed the benefit of any theoretical increase in liquidity.
Also, the paper link in that post is truncated, but I found it on Google and (at least from the abstract) it doesn't seem to support what you're saying. The paper says HFT has caused spreads to go down because in order to mitigate its effects, third parties are breaking larger trades into smaller ones. But that only reduces the spread on paper by increasing the number of transactions.
