It's not really a loophole. It's a fundamental property of the universe.
Consider currencies for example. Say someone in Tokyo was selling USDJPY at 84 and this was the best price anywhere in the world, then naturally anyone buying would want to buy from them. But the guy in London who wants to buy won't see the price of 84 until 90ms later, so he ends up buying from someone in New York at a worst price.
So the guy in London got a worse price and the guy in Tokyo didn't get a sale. Despite the fact that in an ideal world they would have been matched together, the fundamental laws of the universe conspire against them.
Essentially what ends up happening is that for any one currency you end up with a bunch of local market (NY, Tokyo, Singapore, London) all of which have slightly different prices from each other, which isn't a great situation to be in. Reducing latency won't make this problem go away, but it helps flatten out the markets and ensures that people get the best price globally (as opposed to just locally) wherever possible.
You're assuming the conclusion, that continuous buying and selling is the only possible way to run a market. But another way to run it would be to have an auction every five minutes. That way there are more buyers and sellers to match up, so it's more likely that everyone gets a fair price. And don't talk to me about liquidity - nobody really needs to trade that quickly.
In a way we have what you're suggesting. Look at what happens overnight when exchanges are closed. You see a big jump from the closing price to the opening price the next day. Even though you can't trade over that period the price still changes - you just restrict trading and price discovery to people who can do OTC or pre-market trading.
It's not as if people haven't tried other models, EBS who run one of the major currency exchanges restrict price updates to once every 100ms. They're losing customers to other exchanges who allow people to trade faster.
People with deep backgrounds in algorithmic game theory have been studying exchanges and auction design for a long time now. If someone could figure out a better design for exchanges, they'd be building it.
Consider currencies for example. Say someone in Tokyo was selling USDJPY at 84 and this was the best price anywhere in the world, then naturally anyone buying would want to buy from them. But the guy in London who wants to buy won't see the price of 84 until 90ms later, so he ends up buying from someone in New York at a worst price.
So the guy in London got a worse price and the guy in Tokyo didn't get a sale. Despite the fact that in an ideal world they would have been matched together, the fundamental laws of the universe conspire against them.
Essentially what ends up happening is that for any one currency you end up with a bunch of local market (NY, Tokyo, Singapore, London) all of which have slightly different prices from each other, which isn't a great situation to be in. Reducing latency won't make this problem go away, but it helps flatten out the markets and ensures that people get the best price globally (as opposed to just locally) wherever possible.