DEFINITION of 'Internalization'

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.

BREAKING DOWN 'Internalization'

Brokerage firms internalize securities orders to take advantage of the difference between what they purchased shares for and what they sell them for, known as the spread. For example, a firm may see a greater spread by selling its own shares than by selling them on the open market. Additionally, because shares are not conducted on the open market the brokerage firm is less likely to influence prices if it sells a large portion of shares.

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