You are conflating market making and latency arb, which are not the same thing. All of your points apply to latency arbitrage and you haven't said anything about market making.
As long as there are profitable arbitrage opportunities, people are going to go after them. The profits from latency arb aren't infinite and things will hit an equilibrium when the profits line up with the costs. Incidentally, I don't think latency arb is a bad thing. The arbitrageurs keep prices in line between exchanges, so you don't have to worry as much about getting a crappy price at one exchange when a better price was available at another exchange.
No I'm not, I clearly said "You can make a little bit better case for electronic market making." But if you think market making has no major latency component, you are living in the 70's.
As long as there are profitable arbitrage opportunities, people are going to go after them. The profits from latency arb aren't infinite and things will hit an equilibrium when the profits line up with the costs. Incidentally, I don't think latency arb is a bad thing. The arbitrageurs keep prices in line between exchanges, so you don't have to worry as much about getting a crappy price at one exchange when a better price was available at another exchange.