Internalization
Market Microstructure glossary · Market Microstructure Fundamentals
Definition
When a broker-dealer fills a customer order from its own inventory rather than routing it to a public exchange.
Internalization in plain English
Internalization is when the brokerage that takes your order fills it themselves — out of their OWN stockpile of shares — instead of sending it to a public exchange to find a buyer or seller. It's like ordering a book from a shop that happens to have it on the back shelf, so they hand it over directly rather than ordering it from the warehouse. The broker likes this because they can earn the tiny gap between the buy and sell price, and you often still get a fair (sometimes better) deal. The trade-off is that this business happens privately, off the public marketplace where everyone can see it.
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