INTERNALISATION CROSSING ENGINES
Internalisation is a practice associated with the order-routing decisions of brokers. Orders may be executed in-house against a trading firm’s inventory (Broker Crossing Network BCN), or Systematic Interanlizer (SI). Internalisers match or provide price improvement compared to the Best Bid and Offer (BBO) that a customer would receive if their orders were sent directly to an exchange. If an internaliser is unwilling to match or improve the BBO for a particular order, it will route the order to other trading centres. In doing so, it will generally prefer trading centres that do not charge an access fee, such as “dark pools” 3 , electronic communication networks (ECNs) , multilateral trading facilities (MTFs) and other internalisers.
If the order is not filled within a short time, it is routed directly to displayed liquidity centres, where it competes with other orders for liquidity, and obtains execution on the risk-less principal basis. In traditional internalisation, dealers fill customer orders from their own inventory, thus earning the spread. If the dealer limits his/her internalized flow to orders from uninformed investors, he/she may earn excess rents due to smaller adverse selection costs. In an internalisation dark pool, dealers send customer orders to a dark pool they have established. The dealers then sell access to that dark pool to traders who can earn excess rents by interacting with uninformed orders. In this case the dealer earns the smaller access fee, but faces no risk from inventory exposure. Internalized order flow creates market fragmentation, as the order matching is isolated from interaction with the displayed liquidity centres. Internalisers reap the benefit of price discovery from displayed liquidity centres, but deprive exchange market makers of liquidity provision as they keep the order flow in private markets.
Crossing (BCN) / Systematic Internaliser (SI)
- Reference point matching
- Auction trading model
- Flexible matching logic
- Mid-point matching
- Quote driven
- Reg NMS support
- Venue onward order routing (SOR)
- Administrator front end
- Analytics and monitoring
- Latency monitoring
- Price Time Priority