[username223]

It does up to a point. I think we're well beyond that point, when people pay for microwave relays to get a few milliseconds of arbitrage, because light is faster in air than in fiber. If someone ever drills a hole through the earth's core, it will be traders looking to save latency between New York and Hong Kong (kidding, I hope).

[miscellaneous]

Yes I absolutely believe that there are diminishing returns associated with arbitrage. I would personally think that exchanges should put some lower limit on the 'time resolution' of their markets to prevent HFT investment beyond a certain point.