The Market Is Neither Free Nor Fair

Let’s be real: Most people didn’t really pay attention to the inner workings of the stock market until a community of individual investors figured out this system we all obsessively track wasn’t at all transparent or fair. In subreddits and other corners of the internet, these investors realized that hedge funds were shorting certain stocks, including GameStop, and decided to beat them at their own game. They banded together to send the price of GameStop stock through the roof — and in the process they ended up exposing giant faults in the stock market and pushed it to the breaking point. It was big news.

It turns out, as we learned on our Stocks episode, that the stock shorting stuff is just one piece of a very complex puzzle. As much as we’re all aware of the market’s daily ups and downs, almost none of us understand what’s really going on beneath the surface. That’s by design. The financial firms who dominate the market have purposefully built an intricate system of back room trading and money making schemes that are so byzantine that they’re nearly impossible to regulate. That makes it easy for the rich to get richer, but it also makes the entire system incredibly fragile.

At this point, the stock market is essentially a casino — except casinos are really well-regulated and cheaters get kicked out.

The Math Does Not Add Up

The premise behind stocks is simple: People invest money in companies they believe in, and if the companies do well, then they do well. For most of history, however, in order to actually buy stocks you needed a broker to act as the middle man – he took your money and used it to buy you shares in a company. Naturally, the brokers didn’t do this work for free, and this made it almost impossible for most of America to participate in the stock market. Make no mistake, the stock market was an elitist operation from the very first ring of the bell.

[Want to read more on this? Check out Jon’s Spotlight on Apple News.]

Obviously this set-up led to significant inequality in the market. The Federal Reserve began analyzing stock ownership in 1989 and found the top 10% of households owned 78% of the market. Eventually, with the dawn of the internet, discount e-brokers like E*Trade emerged and tried to democratize the market. Though this did lead to more people entering the market, the inequality in the market went up right along with it. 

But don’t worry, finally Robinhood came along to save the day! You know the one who steals from the rich and gives to the poor? Well, sort of. This Robinhood was less of a folk hero and more of an app that let people trade with no fees or commissions. So now anyone could invest, no middleman or exorbitant fee needed. Hurrah, now we can all get equally rich! Equal! Rich! Two words that have always gone together!

Would it upset you if we told you that this has only made market inequality worse? Sorry, kid. Even as more and more people are able to trade, giant firms are still the ones who know how to profit the most. 


So now there’s this handy investment app, right there on your smartphone. You’d think, given how we’re led to believe the stock market works, that when you hit the “buy” button on an e-brokerage app like Robinhood, your order would go directly to the stock exchange, your money would then be traded for a share of stock, and then you’d be the proud owner of said stock. But, alas, this is where this story turns dark.

What actually happens the majority of the time when you hit “buy” on the app is called “Payment for Order Flow.” That’s when your order and money go to big Wall Street firms called “market makers” — basically middlemen who match buyers to sellers. Citadel and Virtu are two of the biggest market makers. These orders rarely goes to the stock exchange. Instead, market makers match them with other orders they have also already paid for, or they slip these orders into what are called dark pools. 

Market makers pay Robinhood and other trading platforms a ton of money for the privilege of doing this matchmaking, and would you believe they’re not doing this out of the goodness of their heart? They’ve said it’s because they want to keep the market democratized, but here’s the reality: Payment for Order Flow allows market makers to use the small differences between the price a stock is bought and sold for to make pennies off of every transaction they process.

This doesn’t sound like a big deal, but when you consider the gazillions of transactions they’re processing, you realize that actually a gazillion pennies is quite a lot of money.

This scheme is already illegal in many other countries, and there’s a push to outlaw it in the U.S., but for the moment, it’s perfectly legal. Now we see why the rich men in charge want a “democratized” market: The more people who are trading, the more money they can make off of them. 


It’s time to talk about the apes — that’s an acronym for All People Equal, if you’re wondering. They’re the community of Reddit users who started the GameStop stock buying frenzy. You can read more about their ingenious and slightly terrifying plan right here. It all worked a little TOO well. So well that one day Robinhood suddenly stopped allowing users to buy GameStop stock. This move was deeply sus, if you ask pretty much anyone who is not Robinhood.

For their part, Robinhood said they’d gotten a call from their clearinghouse. OK, yes, but other people were suspicious for a couple of reasons, one being the fact that a hedge fund called Melvin Capital, which lost billions in the GameStop frenzy, got an investment/bailout from… Citadel hedge fund, the totally unrelated hedge fund owned by the same people who own Citadel Securities, which is the Payment for Order Flow company that handles Robinhood’s orders.

quote icon

“What happens with an extremely complex system is that it leads naturally to this level of inequality and this level of exploitation, because a few firms who are big enough can take advantage of that complexity.”

— Panelist Dave Lauer


The stock market right now is a real mess. We’ve got exceedingly wealthy firms setting their own rules and treating retail investors as “dumb money” that can be exploited for their gain. Doesn’t feel great, right? 

Let’s start with the Securities and Exchange Commission, aka the SEC, the government body that regulates and monitors the stock market and the investors and firms that participate in it. In theory, the SEC is there to create regulations that protect investors and make sure they’re not getting screwed over (*ahem* Payment for Order Flow), as we saw in Jon’s interview with current SEC chairman Gary Gensler in this episode, they’re in a very tough spot. 

As Jon put it, they’re the sheriff and they’re outgunned. They don’t have enough resources, and they definitely can’t keep pace with the technological advancements that are happening constantly in the financial industry. We’ve got a deeper dive on the many issues standing in the way of the SEC right here for you.