Really? Do you have any evidence for that or are you just spouting off the standard line that faster trading necessarily means better trading? I don't see how any economic conditions could change enough in three or four milliseconds to justify the amount of high frequency trading that goes on today.
If there is evidence to be found either way, you may want to look into studies of the Taiwan Stock Exchange.
In the past the TWSE had a similar mechanism to the one you suggest: 30-second call auctions all day long (as compared to other exchanges who typically only had auctions at opening and closing time, and did continuous trading the rest of the day). Basically they'd give one best bid/ask update on a stock, gather new orders for a while (it was slightly random, sometimes as little as 22 seconds IIRC), match them at the volume-maximising price, and send out the new best bid/ask update. (Within this structure there was still time priority --- i.e. you only had to wake up once every 30 seconds, but when you did you had to send your new order ASAP. Also there was no atomic price amendment message ... you had to send an order delete and then an order create message, which caused all sorts of hilarity when they decided to take more than 30 seconds to send you a cancel acknowledgement.)
I read a study from 1998 basically supporting your position ... the authors concluded that "The call market method is more effective in reducing the volatility of high-volume stocks than low-volume stocks. This contradicts conventional wisdom which suggests that the call market method is superior for thinly traded stocks, while the continuous auction method is preferred for heavily traded stocks. The call market method does not impair liquidity and price discovery in the call market appears more efficient than in the continuous auction market." http://www2.hawaii.edu/~rheesg/Belgrade/Taiwan/TSEfinal.pdf
At this point I don't know yet of any detailed studies of the effects of that change. Also it's been years since I traded TW stocks, and I never traded TW warrants, so unfortunately off the top of my head I can't offer you an anecdotal account of the effects of the change either.
First, 4ms is 3.4 orders of magnitude off 10 seconds.
Second, do you have any argument that isn't based on personal ignorance?
The stock market isn't even open at night, no one thinks that it is necessary to trade 20 times a second every second, they just want to. The stock market doesn't directly represent economic conditions, it represents investors assessment of economic conditions, thus it can change as fast as they can change their mind. If someone wants to only trade every ten seconds they can go ahead. If someone wants to open a stock exchange where everyone can only trade every ten seconds they can go ahead.
How does a machine taking advantage of small arbitrage opportunities that last fractions of a second represent an "investors assessment of economic conditions"?
It might help if you consider a worked example. Say you had a market for EURGBP which only updated once a second and every second the price moved an average of 10 pips.
Now if you're a market maker it's very risky for you to offer a spread below 10pips because if the market moves by 10pips you're suddenly off-market and someone can arbitrage you by buying from you and selling on the market (taking a risk-free profit and pushing the loss onto you).
Now consider if the market was updating every 100ms and the price of EURGBP only moved by an average of 1pip every 100ms, it means you as a market maker can offer a 5 pip spread comfortable in the knowledge you can pull your price before an arbitrage situation occurs.
This lower spread you're offering is now available to your customers (who are likely to be other financial firms, big companies, and retail FX brokers). Because the retail FX brokers are getting a better spread they can offer a tighter spread to their retail customers.
This isn't just theoretical, FX spreads for retail customers (like folks going abroad or importing goods) are a lot tighter now than they were even a few years ago primarily because of faster trading.
