[msellout]

I meant efficiency as in low spreads, not as in Fama.

I tried to state the mechanism directly, but apparently didn't do so very well. I could try again, but I think it'd be more effective to appeal to authority. Check out "The Race to Zero" by Andrew Haldane at the Bank of England (http://www.bankofengland.co.uk/archive/Documents/historicpub...). It appears that the presence of too many low latency / high frequency players puts the market in a state where it can phase shift, crossing from normal "stable" dynamics to a dramatic spiking dynamic. In normal times, "HFT" increases liquidity and reduces spreads. Every so often those HFT players leave the market suddenly, nearly simultaneously, causing a liquidity crisis.

Note that many exchanges enforce a short pause in trading when the market seems to be going crazy. The delay appears to help, so long as traders don't move to a different exchange.

[yummyfajitas]

HFT has clearly lowered spreads. This isn't even in dispute.

The issue of market makers pulling out during a crisis is a regulatory issue; an market maker might do the right thing and push the market back towards where it should be and then be punished by a regulator who breaks the buy trade. If this behavior is undesirable then eliminate the "clearly erroneous trade" rules.

Your citation also doesn't address any specific mechanism by which a delay would improve things. All it does is speculate that speed might be bad due to fat tails and handwaving.

[msellout]

If we hypothesize that speed might be bad, shouldn't we do an experiment to decrease speeds?

You also haven't addressed the point that many exchanges currently implement delays in times of crisis.