I'm skeptical of the thesis myself, and even if it is correct, I don't think it makes a good argument for sacrificing your own wealth in the service of improving price discovery.
One slight quibble, though: high frequency traders make their money by providing liquidity, not (as far as possible) betting on the future profits of companies.
Oh, that's an interesting point about high frequency trading.
I think the question of what percentage of the market could be invested in index funds before things got weird is an interesting one. It really is hypothetical, though. Independent investors have more sway, not less, as an increasing number of people put money in index funds. There will always be a lot of people who are very rationally (and also depending on the investor... less rationally) unwilling to give that up.
One slight quibble, though: high frequency traders make their money by providing liquidity, not (as far as possible) betting on the future profits of companies.