[noonespecial]

What if it is a third party who is the HFT? Mary sees Jacks buy on A and uses the speed advantage to buy Jill's shares on B preventing Jack from finishing the transaction and Jill from reacting to increased demand. What if Mary was created solely for this purpose? When does it turn from arbitrage to rent seeking?

[gone35]

Same thing: now it is Mary who trades her short exposure risk for a bet that Jack's buy offer of $17.00 is not his maximum willingness to pay, while Jill just gets to fill her original sell order instantly (as opposed to "waiting" a few ms for the offer to arrive at her exchange). In both cases, Jack's is being forced to reveal more about his true valuation of the stock by paying up closer to his best possible offer.

Note in a perfect auction it should be Jill who receive the $17.05; but exchanges are more like (millisecond fast) mail-order catalogues, where the prices you quote are fixed the moment you send off your order. It would piss many people off that you only got half the items you wanted every time because the listed prices "went up" in between the time you mailed your order; but it would also make the whole thing closer to an auction.. so that's that.