brokers internalizing orders -- bad?

[MK020]

Two questions from a newbie on brokers internalizing orders:

1) For market orders, why is this a bad thing? If you are getting a better price, even if just by 0.0001 than you would otherwise, how is this a bad thing?

2) Can limit orders actually be internalized? How is that fair? Doesn't it just amount to the broker not submitting your order?

 

[Occam]

Two questions from a newbie on brokers internalizing orders:

1) For market orders, why is this a bad thing? If you are getting a better price, even if just by 0.0001 than you would otherwise, how is this a bad thing?

2) Can limit orders actually be internalized? How is that fair? Doesn't it just amount to the broker not submitting your order?

1. Yes it is bad, on average; you'll typically get only $.0001, whereas if you were to hit a hidden order in the real market you'd get at least 100 times as much. The wholesaler your broker has sold your flow to will then have the option of pocketing what you should have gotten yourself.

But the larger issue is that it damages the market's overall quality, cost, and transparency -- it drives spreads up and reduces visible liquidity, for the exclusive benefit of a handful of "wholesaler" firms and brokers. The rest of us foot the bill, whether we can see it or not.

If you care, I'd suggest checking into it yourself and sending a letter to the SEC and/or to your Congress person. They do consider "comment letters", and the industry employs an army of lobbyists to further their own interests, so letting the elected officials/SEC people know that you care could act as some much-needed counerweight.

2. Yes they can; the execution quality on retail orders intentionally kept off the order books can be terrible. It happened to me at least once at a major discount broker. The best offer went right through my submitted bid, and I missed out on $10k+ plus profit in my retirement account.