Order Flow Internalization refers to the practice where a broker-dealer or a trading platform executes client orders using its own inventory or by matching them internally against other client orders, rather than routing them to an external public exchange. This process occurs within the firm’s private liquidity pool.
Mechanism
The operational logic involves the internal matching engine receiving client orders and seeking to fill them directly from the firm’s principal book or by pairing them with contra-side client orders. The firm acts as a market maker, profiting from the bid-ask spread or by offering a marginally better price than available externally. This minimizes the need for external market interaction for a given order.
Methodology
In crypto, particularly for Request for Quote (RFQ) systems and institutional options trading, order flow internalization is a strategic approach to provide deep liquidity and reduce market impact for large block trades. By keeping orders off public order books, firms can execute significant volumes without exposing their clients to front-running or excessive slippage. This methodology prioritizes efficient execution and price improvement by leveraging internal liquidity.
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