Internalisation
Internalisation is when a broker or dealer fills a customer’s order from its own inventory or against another customer, instead of sending it to an exchange.
Internalisation is when a broker or wholesaler fills your order from its own inventory instead of sending it to an exchange. It is common in retail stock trading and is closely tied to payment for order flow. Rules differ by country.
- Category
- Market Structure
- Reading time
- 3 min
- Also called
- Internalization, In-house execution
- Updated
Internalisation in plain words
Instead of sending your order to an exchange or another market maker, your broker may fill it from its own stock.1
When it does, the broker can earn the spread.1
Wholesalers often fill retail orders in-house this way, trading against their own inventory.2
How internalisation works
You place an order
A retail order goes to your broker.
Routing
The broker may route the order to a wholesaler (a market maker) that takes the other side, and get paid for doing so — payment for order flow.2
In-house fill
The wholesaler fills the order from its own inventory.2
Spread capture
The firm may make money on the "spread".1
Best execution
Orders handled internally must still be checked one by one for execution quality.3
Reviews
Firms that internalise must regularly and thoroughly review how well those orders were executed.4
Worked examples
Example 1 — Price improvement
Saved 3Hypothetical quote 15.00 / 15.04. Buy 300 filled in-house at 15.03.
| Improvement | 0.01 × 300 = 3 |
Because each internal fill is reviewed for quality, small price improvements are common.3
Example 2 — Spread earned
Firm earns 20A hypothetical wholesaler buys at 15.01 and sells at 15.03 on 1,000 shares.
| Spread | 20 |
This is how the firm may make money on the "spread".1
Example 3 — PFOF
Broker earns 100A hypothetical broker gets 0.001 per share on 100,000 shares.
| Rebate | 100 |
Payment for order flow is the rebate a broker receives for sending retail orders to a wholesaler.2
Internalisation vs exchange routing
| Aspect | Internalisation | Exchange routing |
|---|---|---|
| Counterparty | Broker or wholesaler | Other market participants |
| Visible quote | No pre-trade display | Displayed |
| Price improvement | Often small | Possible via hidden orders |
| Conflict | Spread and PFOF | Fees and rebates |
Where internalisation matters
Broker choice
How your Broker routes.
Market makers
Role of the Market Maker.
Costs
Hidden Bid-Ask Spread costs.
Fills
Comparing Market Order quality.
Advantages and disadvantages
Advantages
- Fast fills for retail orders.
- Frequent small price improvement.
- Enables zero-commission models.
Disadvantages
- Conflicts of interest.
- Orders do not reach public markets.
- Hard for clients to verify.
- Rules differ by country.
Going deeper
Read as far as you need. Each level builds on the one before it.
In-house fills
Beginner
Wholesalers commonly fill retail orders internally, from their own stock.2
Best-ex duty
Intermediate
Even internal fills must pass an order-by-order check of execution quality.3
Reviews
Advanced
Firms that internalise orders must review execution quality regularly and rigorously.4 Other jurisdictions treat this differently.
Common mistakes
Assuming zero commission means free
Spread is a cost.
Ignoring routing reports
Read them.
Using market orders in thin stocks
Prefer a Limit Order.
Assuming same rules everywhere
Rules differ by country.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Internalisation fills orders in-house.
- It is linked to PFOF.
- Firms may earn the spread.
- Best execution still applies.
- Rules differ by country.
Frequently asked questions
Is internalisation bad?
Is PFOF allowed everywhere?
How do I know if my order was internalised?
Further learning
- Market Maker
Who internalises.
- Broker
Your routing choice.
- Bid-Ask Spread
Where the firm earns.
- Limit Order
Price control.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- U.S. SEC. Internalization (opens in a new tab) Checked .
- Congressional Research Service. Payment for Order Flow (PFOF) and Broker-Dealer Regulation (opens in a new tab) Checked .
- FINRA. Regulatory Notice 15-46: Guidance on Best Execution Obligations (opens in a new tab) Checked .
- FINRA. Rule 5310. Best Execution and Interpositioning (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.