Internalization refers to the process whereby a dealer seeks to match staggered offsetting client trading flows on its own books instead of immediately trading the associated inventory imbalance in the inter-dealer market. Internalization can provide significant benefits to dealers, including improved execution quality and lower costs. However, internalization can also create risks for dealers if not managed properly.There are a number of factors that dealers need to consider when deciding whether or not to internalize client trades. These include the size and frequency of trade flows, as well as the level of competition in the inter-dealer market. In addition, dealers need to have robust risk management systems in place to ensure that they are able to manage any potential risks associated with internalization effectively.Overall, internalization can be a useful tool for dealers looking to improve their execution quality and reduce costs. However, it is important for dealers to carefully consider all relevant factors before making any decisions about whether or not internalizing trades makes sense for their business.
