HFT has reduced costs under 99.99% of market environments. My direct cost and slippage is still so much lower than it would have been 30 years ago. Hell, even 10 years ago.
They would simply vaporize. At the margin, people trade because the frictional costs (spreads, fees, pricing/tracking error, risk) of trading are low. Fewer people would trade.
HFTs basically play an intermediary role: risking capital to buffer supply/demand imbalances, aiming to buy things at a discount or sell at a premium to their perceived value. The more transactions an intermediary does, the smaller his margins per transaction can be. Low margins fuel even more transactions in a virtuous cycle, and competition drives margins down.
Take this thought experiment to an extreme level. What would happen if short term speculation were banned, all stocks traded January 1, and had to be held for a year? Only very wealthy people with high risk tolerance could participate in the market, since they couldn't sell companies at will to fund personal expenses or if the business underperformed.
Volumes would plummet. Exchange/brokerage fees would be a significant percentage of the deal size, similar to what real estate agents charge, since they can only do a few transactions. Intermediaries would be something akin to a private equity fund, bidding 10-20%+ under value to cover the risk of holding for a year.
Even with trading reduced to once a minute/hour/day, many trades HFTs take the other side of now--say a medium frequency quant fund believes a company is underpriced by 0.1%--simply would not exist anymore, because spreads and fees would increase. Most ETFs would disappear. The marginal cost for an HFT to make markets in some small ETF is basically 0, but a human would make more at McDonalds than market making an ETF that trades a few hundred thousand shares a day.
As noted elsewhere in this thread, I suspect new markets would spring up. If the underlying could only trade once a year, the options market would be huge.
They would go to whomever else was marker makers, whomever else was doing short-term trading, and some of fhe rest to quant firms doing frequent but not hft trading.
