That was an interesting read. Thanks for posting.
I agree with the paper and those who've said it before. The whole internalization thing has to go. In my eyes, that is so much worse than all of this hate for the run of the mill HF trader/shop.
As for Market Makers, I'm not quite sure what should be done. I dont think every HFT needs to be a market maker and be bound by their rules. But, I do understand why a true Market Maker should get preferential treatment. That letter makes a good case for one way to go about it (slight time advantage). I just don't know what the ramifications of such a thing would be.
One idea that just came to mind. And maybe it has been proposed already. But those that are willing to be market makers should be able to receive rebates. But if you aren't a MM and bound by the rules that go along with it, you don't get the rebates and have to make your pennies another way. I'm sure that would piss off a lot of people. But maybe it would serve its purpose of making sure we don't end up with a system w/o MMs.