...but the way CDOs were structured made it impossible to objectively value the risk behind the instrument.
The article you link to merely shows that under certain circumstances, a CDO market can become a market for lemons. Everyone already knows this, which is why the standard industry practice was for issuers/packagers to keep skin in the game - sell off the AAA tranches but keep the risky ones for themselves.
It was not impossible to objectively value them - they were simply valued incorrectly based on assigning low probabilities to the possibility that house prices go down.
Your claims about HFT are simply ignorant. No one has to pay the spread (which is lowered by HFT), you can always post orders at the bid/ask and use ALO orders if you want to avoid it. People choose not to because they don't want to accept execution risk.
The article you link to merely shows that under certain circumstances, a CDO market can become a market for lemons. Everyone already knows this, which is why the standard industry practice was for issuers/packagers to keep skin in the game - sell off the AAA tranches but keep the risky ones for themselves.
If you actually want to learn about CDOs, go read this paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1421837
It was not impossible to objectively value them - they were simply valued incorrectly based on assigning low probabilities to the possibility that house prices go down.
Your claims about HFT are simply ignorant. No one has to pay the spread (which is lowered by HFT), you can always post orders at the bid/ask and use ALO orders if you want to avoid it. People choose not to because they don't want to accept execution risk.