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Priority Rules, Internalization, and Payment for Order Flow

Hans Degryse & Nikolaos Karagiannis

Review of Asset Pricing Studies2025https://doi.org/10.1093/rapstu/raaf004article
AJG 3ABDC A*
Weight
0.50

Abstract

Internalization happens when orders submitted through the same broker are intentionally matched to each other on-exchange or off-exchange. We study the impact of allowing (modes of) internalization on trading rates, investor welfare, and payment for order flow (PFOF). Internalization affects the choice between limit orders and market orders and the participation of dealers in trading. Greater dealer participation creates a greater scope for PFOF. A crucial determinant is the size of the tick. For small ticks, compared with the absence of internalization, its presence leads to higher trading rates, lower investor welfare, and more PFOF. The opposite holds for wide ticks. (JEL G10)

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https://doi.org/https://doi.org/10.1093/rapstu/raaf004

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@article{hans2025,
  title        = {{Priority Rules, Internalization, and Payment for Order Flow}},
  author       = {Hans Degryse & Nikolaos Karagiannis},
  journal      = {Review of Asset Pricing Studies},
  year         = {2025},
  doi          = {https://doi.org/https://doi.org/10.1093/rapstu/raaf004},
}

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Priority Rules, Internalization, and Payment for Order Flow

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Evidence weight

0.50

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.50 × 0.4 = 0.20
M · momentum0.50 × 0.15 = 0.07
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

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