One of the claims made about the rise of zero-commission trading for retail investors is that it has given retail investors greater access to the stockmarket, and therefore wealth accumulation.

While this is superficially true (decrease cost and demand increases, all else equal) it misapprehends why brokerages can offer commission-free trading. And that's important to understand, *especially if* your argument is that retail investors need access to the stock market.

Brokerages can offer commission-free trading because hedge funds will pay the brokerages for their order flow.

In other words, the retail investor becomes a product that the broker sells to hedge funds.

Why do hedge funds want this data? Because understanding retail order flows tells high frequency traders where there is demand and where there is slack in the market.

And because the hedge funds sit so close to exchange servers, they are able to front run all of these retail traders, and buy stocks for which there are a large number of retail buy orders, and sell stocks for which there are a large number of sell orders.

If you are a retail investor who buys and holds for the long term, you don't really care about front-running, because the price you get when you want to buy doesn't matter much if the difference between being front-run and not being front-run is a couple of pennies.

But if you are a retail investor and you want to trade frequently, your gains will be eaten up by front-running.

Which means you won't be participating in the wealth accumulation that many people claim Robinhood, etc., provides to retail investors.

If you're wondering whether this kind of front-running is legal: yes, it is.

If you're wondering why this kind of front-running is legal, it is because of a securities market regulation called Reg NMS.

Reg NMS was meant to harmonize market operations in the United States, however, it also created a set of incentives such that institutional investors with the capital to spend on technology figured out that buying order flow from brokerages gave them insight into unsophisticated

investors. As Munger has said: show me the incentives and I'll show you the outcome.

I will write up a more coherent explanation on my substack soon.