What Is ‘Order Internalization’ and How Does It Relate to Retail Crypto Brokerage?
Order internalization occurs when a broker-dealer executes a client's order internally, or with an affiliated party, instead of routing it to a public exchange. In retail crypto brokerage, this means the broker acts as the counterparty or routes the order to a related liquidity provider.
This practice is often done to capture the spread or a fee. While it can offer fast execution, it raises questions about best execution and potential conflicts of interest.
Glossar
Retail
Participation ⎊ Retail refers to individual investors and traders engaging directly with cryptocurrency markets.
Internalization
Mechanism ⎊ Internalization, within cryptocurrency derivatives and financial markets, represents the strategic retention of order flow by market participants, typically brokers or exchanges, rather than routing it to external venues.
Conflict of Interest
Bias ⎊ The inherent challenge within cryptocurrency, options, and derivatives stems from the potential for bias to influence decision-making, particularly when individuals or entities hold positions that benefit from specific market outcomes.