Internal Routing, in the context of institutional crypto trading, refers to the practice where a broker-dealer or an over-the-counter (OTC) desk directs client orders to its own proprietary trading desk or an affiliated execution venue for matching and settlement, rather than sending them to external, independent exchanges or liquidity providers. This process occurs within the broker’s internal systems.
Mechanism
The operational mechanism involves a smart order routing system that, upon receiving a client’s RFQ or trade request, first evaluates the possibility of matching it against internal liquidity sources, such as other client orders, proprietary inventory, or dark pools operated by the same entity. If an internal match is identified at a competitive price, the order is executed internally. If not, the system may then route the order to external venues, following predefined execution logic.
Methodology
The strategic methodology behind Internal Routing aims to capture a larger share of the transaction spread and manage internal liquidity efficiently, potentially offering clients tighter spreads or faster execution under certain conditions. However, it requires stringent internal controls and regulatory oversight to mitigate potential conflicts of interest, ensuring client orders receive best execution despite being processed internally. The guiding principle for clients is to scrutinize the broker’s execution policy and transparency around internal matching practices.
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