Commissions when Soes started were around $25 per 1000 shares. After a couple of years some firms were down to $12 per share. Before Reg NMS you could have a stock with a 1/4 spread on the Nasdaq but you would have an ecn such as Brut or Redi doing a half point spread. Do the math. If you buy a quarter point below the national bid and sell at the bid, you made $250 and paid around $15 in commission. Don't tell me it is an academic argument because there are P&L statements that say otherwise. Reg NMS required top of book to get done before lower bids. That basically did away with the arbs. I guess you are one of those that think markets are always efficient. As one major hedge fund manager is known to say "everyone I know who believes the markets are efficient is broke". There are inefficiencies in the market, just a lot less than there used to be and they aren't as obvious. The bulk of the consistent money in the market these days seems to be in trading the spreads and collecting rebates.
Also, co-location is a real advantage for trading stocks off fast breaking news or if you believe every tick of the futures signals a directional move in the market. However, most of the ticks in the S&P futures are probably just random filling of orders (taking out bids and offers) and don't necessarily signify any real change in the market direction. This means the firms that use co-location to try to move bids with the futures probably aren't getting any real advantage. The fact that these firms use programs with almost no human oversight means they can't change their methodologies quickly enough to take advantage of inefficiencies. In effect they might tend to create their own market inefficiencies.
tm689, Like many here, and I call them out all the time, ajacobson is totally clueless here. Maybe you had to be there. I was. If you told him you traded in the 1880's and used carrier pigeon to get the news faster, he'd tell you , "but you had to feed the bastards and then they shit all over you" I'm not sure co location is a big deal in the s&p, but it damn sure is for stocks.