Define “Internalization” of Orders and Its Potential Impact on Price Improvement

Internalization is the practice where a broker-dealer executes a customer's order against its own inventory rather than sending it to a public exchange. This allows the broker to capture the spread.

While internalizers are required to provide execution at or better than the National Best Bid and Offer (NBBO), critics argue that this process limits the potential for genuine price improvement that might occur on a competitive public exchange. It is a trade-off between guaranteed execution and potentially better pricing.