Brokers have one more routing option. They
can send your order to another department in their firm for execution.
In that case the firm, acting as dealer, buys the stock you want
to sell for its own account or sells you shares it holds. Then
the transaction is reported to the exchange or market where the
stock is listed.
An internalized trade, sometimes called a
principal transaction, may result in the fastest trade at the
best price. The firm keeps the spread, which is the difference
between the price it pays to buy the stock — either from
you or some other seller — and the amount it realizes when
it sells the stock to you or someone else. But the spread may
be smaller than it would be with a different execution, in which
case you, as buyer or seller, benefit.
Your broker is obligated to notify you when
a trade is internalized. In other cases, you can ask where the
trade occurred, if you're interested, and your broker will
tell you. Your firm may also execute your order by going directly
to another firm. In that case, the transaction is reported to
the appropriate market just as an internalized trade is, but the
recordkeeping and financial arrangements are handled between the
firms.
Making money
In an auction market, brokers profit from the commissions
investors pay for execution. Market makers profit
from the spread between the prices at which they buy
and sell the stocks they trade, and ECNs profit from
the fees they charge for using their system to trade.
