In a sense the markets should be unstable. A perfect market would be so sensitive that any new information, every order from a fundamentals trader, should shift the price. That's what these high speed transactions get you - more accurate prices, and faster. And as a result of that they can offer much narrower spreads than you'd get elsewhere.
Benefits? Knight gave a bunch of other market participants a better price than they could get anywhere else, and no-one traded at a price they didn't agree to.
A non-economist wants to know: if liquidity is beneficial to our economy and liquidity is a function of time, how how does the time-benefit curve look as t approaches 0? I don't know if you can quantify the benefit and map this curve, but if you could I don't imagine it would scale to infinity as time approached zero.
Liquidity isn't a function of time, it is a function of relative time between the predators (arbitrageurs) and the prey (market makers). If the predators are much faster than the prey, liquidity will disappear since the market makers can't survive (their prices are too stale and they are getting taken advantage of). It has always been this way, even since Nathan Rothschild used carrier pigeons to get news of the Battle of Waterloo.
I don't know how much of a benefit there is, but I doubt it's a problem. If they make a mistake, worst case is they lose money and everyone else gains from it.
Seems like as a rule, they're likely to cause instability, and I have a hard time seeing any benefits in them.