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A trade between an investor and his/her brokerage. That is, the client makes an order to the brokerage to buy or sell a security and the brokerage fills the order from its own inventory of the security. This can be advantageous to the brokerage because it is less expensive than going out and finding another buyer or seller. Some exchanges prohibit these trades, and brokerages are required to report internalization on exchanges that permit it.
To send a customer order from a brokerage firm to the firm's own specialist or market maker. Internalizing an order allows a broker to share in the profit (spread between the bid and ask) of executing the order.