Costs and benefits of trading with stock dealers: The case of systematic internalizers

Systematic internalizers are single-dealer platforms run by investment firms that trade out of their own inventories by internalizing the trades off exchanges. We analyze the determinants of dealers' market shares and trading costs. We find that dealer trades have lower price impacts than exchange trades, consistent with uninformed traders seeking out dealers. Due to their ability to avoid trading with informed investors, dealers often undercut the exchange bid-ask spread when the spread is wide and the tick size is not binding. Dealers can therefore offer lower trading costs and gain a higher market share relative to exchanges.