> Trading companies, including market makers such as UBS , KCG Holdings and hedge fund Citadel LLC, are willing to compete for retail investors' orders because

> Trading companies, including market makers such as UBS , KCG Holdings and hedge fund Citadel LLC, are willing to compete for retail investors' orders because they are considered "dumb money" that shows the professionals where markets are headed. This is contradictory, if retail is "dumb money" it's not indicative of the future direction of the market. The basic deal with internalizers is that they just have to fill you subject to Reg NMS rules, i.e., at or inside the NBBO. The catch is that the NBBO is set based on the lit markets, where as a market maker you have to take flow from any counterparty. As a result the spread that gets offered reflects that built-in risk that some flow you get will be adverse. The internalizer on the other hand has the great deal that they can filter down their flow to retail only, which is on average much less adverse. This gives you some options - you can offer a tighter spread to entice business based on better execution quality, or you can use the extra headroom to pay brokers to drive volume to your business, or both. Argument for internalizers: knowing the risk profile of their customers should let them improve execution quality (offer tighter spreads) over the lit market. Argument against internalizers: transparency is king, if retail flow was driven to lit markets there would be less adverse flow there in general, and spreads would be tighten as market makers competed for the new flow. As I work for a non-internalizing market making operation, I selfishly like the second option, but it's not really clear who is right. My guess is nothing is going to come of this investigation unless there some real shady stuff going on behind the scenes we don't know about - the basic premise of the business model is legal, even if maybe not optimal for the market.