Central counterparty concept implemented by most exchanges is a valid service, as otherwise counterparty risk management would be a nightmare - an example of a useful “middleman”.
Yes, but you and I can't even talk to the exchange. We have to talk to one of many brokers that are allowed to talk to the exchange, and brokers do much more than just passing your orders to exchanges. For example, IIRC they can legally front-run your orders.
Brokers are required to give you NBBO or better. You could set up a direct connection to an exchange if you were willing to pay and were sufficiently motivated to deal with all of that
What I was actually thinking about was the infamous Payment for Order Flow, where your broker doesn't actually send your orders to an exchange, but gets paid to send them to a giant HFT firm which can do whatever it wants with no oversight, including using the information that you are about to place an order to inform their algorithms which may result in them putting out a similar order before yours.
FYI, this is false. These HFT firms are subject to the same regulation as other brokers, which is extensive. In particular, it's explicitly forbidden to front-run pending customer orders, or to share any information about them with the proprietary side of the firm. In my experience, these firms take these rules very seriously.
Under the carpet deals would make it less transparent. It would be hard to detect that top manager sold all his stock to competitors and now is making decisions in their favor.
