Actually if you look at the documents of the new exchange in question, IEX, they don't propose to do anything about HFT at all.
They are still a price-time priority matching exchange, they still allow colocation (well not directly, but they are themselves in data centers that have colocation), they still offer exotic order types, and their much hyped added latency amounts to 350 micro seconds. They aren't trying to remove HFT from the markets, they are trying to disadvantage one class of HFT in favor of another.
I personally don't have any problem with their goal, but they aren't being honest about it and that seems problematic.
1) most of the arguments for call auctions instead of continuous trading assume a centralized call auction that in and of itself adds no cost above our current decentralized exchanges. This seems like an extremely troublesome assumption given that we have seen the negative impact of centralized monopoly exchanges.
2) If it isn't a centralized auction there needs to be some price sync. mechanism. The most obvious one seems to be either latency arbitraging HFT (which for some reason people don't like) or a governmental central auction block the type of which is already causing legislative arbitration in the current markets.
3) Call auctions in and of them selves do not solve the major issue with our current prioritization system. If the auction algorithm has several prices that match the same amount of participants, or if the price it determines has an uneven number of buyers & sellers, who gets priority?
4) Price discovery is currently harder in call auction instruments. That could be because they are only done in illiquid markets and liquidity itself will fix that, but it is an issue with the current examples of this style of trading.
5) "Market" order mechanism. Many, many market participants are more worried about making sure they buy/sell than about high fidelity price fairness. If I say, "I want out of Goog no matter what", that complicates any auction methodology and introduces opportunities for gaming.
At the end of the day, I can't figure out who will actually be protected in this style of market and to whose disadvantage. That is a lot of added complexity for a very vague benefit.
Alternative to banning HFT? I can't think of any. (To clarify by HFT i do NOT mean algorithmic trading in general)
The stock market is a service to provide equity for real production companies to grow. HFT distorts the real value of a stock. There is also 0 chance of any regulation authority to ever check the amount of paperwork HFT produces.
