Abstract

Flow internalization is a prevalent feature of our markets. Broker dealers that internalize flow, defend the practice on the basis that it offers potential price improvement and lowers take fees. This paper studies a mathematical model of limit order book dynamics with and without flow internalization, and derives insights on the effect of the latter on price dynamics and long-run execution costs that are of interest in optimal trade execution and in policy considerations.

Citation

Maglaras, Costis. "The effect of flow internalization in price volatility and trade executions costs." Working paper, Columbia Business School, February 15, 2011.

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