Internalization
Tue, Apr 15Internalization is the process in which a dealer aims to align staggered offsetting client trading activities within its own books, rather than immediately addressing the resulting inventory imbalance in the inter-dealer market.
Flow internalization involves dealers coordinating trades internally instead of engaging in transactions on the open market. For instance, if a bank has Client A looking to purchase $100 million and Client B wanting to sell $100 million, matching these clients against each other can reduce brokerage fees.
If the savings from this process are passed on to the clients, it enhances the overall value. The key to excelling in internalization lies in having sufficient trading volume to effectively match clients and utilizing the best technology available.
Consequently, the largest banks that conduct the highest volume of currency trades, often referred to as "flow monsters," tend to be the most proficient at internalization.
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