Is "internalization" not the same as "dark pools"? I want to understand it functionally as well as from the point of view of regulations. For instance, is it that "dark pools" could be hidden away from a number of regulations while "internalization" is completely transparent?
Is "internalization" not the same as "dark pools"?
Logically yes, but they serve different clients. Dark pools are generally for institutional investors. They generally generate huge transactions which would move the prices, which they might not like. So their orders are executed from the dark pools so the markets aren't spooked and the brokers generate a nice commission for fulfilling the orders. And also to save the institutional investors from HFT firms which ply their trades on large orders to generate their profits.
A transaction conducted within the confines of a corporation rather than in the open market. Internalization can apply to a multinational corporation shifting assets between subsidiaries cross border. In investing, internalization refers to the decision by a brokerage firm to fill a buy order for shares of security from its own inventory of shares rather than seeking to execute the trade using outside inventory.
Internalization is more for smaller orders where the brokers try to profit from the spread, as commissions are more or less restrained by the size of the orders.
Dark pools are not at all transparent as the name suggests hence they irk the regulators. Nobody has raised a finger on internalization, so I can only assume they are transparent as compared to dark pools.