[physguy1123]

Timber Hill did not participate in the retail business to avoid conflict of interests with IB.

For what it's worth, one can't internalize options orders in the same way one can equity orders, purchased options flow must make it to the market. I'm not familiar with the history of this decision but I suspect it's since options are less liquid and have higher spreads, so internalization would get a much worse deal than say auctions. You can rebates from certain exchanges for initiating auctions on them, and can selectively initiate auctions on exchanges which benefit you more, but options orders themselves make it to the market

[jbeyer]

Quite regularly, I see that my orders are filled at Timber Hill, when there are other participants offering at the same price. We may be quibbling over the definition of "internalization", but that is internalization.

[physguy1123]

It is strictly not internalization, in fact, and as far as I know from friends working on retail at the new owner of Timber Hill IB and Timber Hill didn't ever cooperate on optimal routing strategies since Thomas Pterfry didn't want people loosing faith in IB routing. There are plenty of reasons why Timber Hill might win the trade:

  * They might be first in the queue on a price-time exchange, and so naturally get the order

  * They might be on a price-size exchange, and so get some of the fill simply by being present.

  * They probably participate in the auction process, and will naturally get some portion of orders that IB initiates

For what it's worth, Timber Hill USA was bought by Two Sigma ~1 year ago. It wasn't actually unprofitable as shown by public filings, but wasn't making much and Thomas Pterfry didn't want an illusion of conflict of interest.

[jbeyer]

What you say about them "winning" the trade is not accurate. If it were happening on an exchange, as in each of your three examples, the trade would show as being on that exchange, and I wouldn't know who the counterparty was. If the exchange is "Timber Hill", then IB chose to route the order there, which is internalization.

[physguy1123]

If you're talking about the USA, this is incorrect. I actually work in the industry and know how this works

* One has to initiate an auction of the client order, at least in the USA - see https://www.sec.gov/rules/concept/34-49175.htm#P193_52817, specifically "Unlike internalization in the over-the-counter equity market, the options exchanges' rules permit a firm to trade with its own customer's order only after an auction in which other members of that market have an opportunity to participate in the trade at the proposed price or an improved price. This auction provides some assurance that the customer's order is executed at the best price any member in that market is willing to offer". In practice the placing firm will bid for the auction at that price, and non-competitive prices don't get posted since then the firm has to lose money.

* counterparty data is reported by the OCC so regardless of where the order was executed you will know who was the counterparty. It's fairly easy for IB to know whether Timber Hill executed an order, whether or not they intentionally routed it there.

Second, I actually have inside knowledge of a sort about how Timber Hill USA worked before getting purchased by Two Sigma, and they did not work with IB to take customer orders and weren't to happy when they did get customer orders that originated from IB, specifically because people then run around complaining that IB is up to spooky business internalizing with Timber Hill.