Internalization refers to the process whereby a dealer seeks to match staggered offsetting client trading flows on its own books instead of immediately trading the associated inventory imbalance in the inter-dealer market.
Flow internalization refers to the practice of dealers matching trades through their own internal books, rather than trading on the open market.
For example, say a bank has Client A who wants to buy $100 million and Client B who wants to sell $100 million.
Matching them off against each other will save on brokerage costs.
If these savings are passed on to the clients, even better.
The key to being the best at internalization comes down to having enough flow to successfully match off clients, and possessing the best technology.
Naturally, this means the biggest banks that handle the most currency trades, known as “flow monsters “are the best at internalization.