Internalization Meaning

A practice where a brokerage executes a customer’s buy or sell order from its own inventory of assets, rather than sending the order out to a public exchange. Essentially, the broker acts as the "counterparty" to the trade, taking the other side of the customer's bet.

Internalization allows the broker to capture the "bid-ask spread" for itself, rather than letting an exchange take a fee. For the customer, it can sometimes result in a faster execution or a slightly better price (known as "price improvement"), as the broker doesn't have to wait for an external match.

However, internalization is often criticized for a "lack of transparency." Critics argue that it prevents orders from reaching the public market, which can make it harder for the broader market to discover the "true" price of an asset.

In many jurisdictions, brokers are required to prove that they provided "best execution" for the customer, even when internalizing the trade.