FXPA Issues Guidance on Internalisation in Algo Execution
Posted by Colin Lambert. Last updated: July 18, 2025
Internalisation means different things to different people in the FX industry, and is often used erroneously – often for marketing or promotional purposes – in an effort to attract more order flow from clients. There is no doubt that true internalisation, in spite of some critics’ view that it reduces transparency, minimises market footprint and information leakage and helps improve execution quality, but until now the FX industry has not had a definition for the practice.
That has been changed somewhat with the publication by the Foreign Exchange Professionals Association (FXPA) of a paper laying out such definitions (and best practices) for FX internalisation in algo execution. The guidance is the result of months of dialogue within FXPA’s Buy Side Working Group and is aimed at fostering greater transparency, clarity, and execution integrity in the FX market, the association says, adding that by establishing common definitions and best practices, the paper seeks to reduce confusion and potential information asymmetry stemming from inconsistent use of the term.
The guidance stresses that when trading via algos, LPs must disclose the venue or mechanism used to internalise trades clearly in post-trade reporting. It defines two types of internalisation model – client-to-client neutrality and LP commercial flow offset – and recommends that clients are informed as to which method is used to internalise their orders. Full timestamping and audit trails are also recommended to ensure execution integrity.
Client-to-client neutrality is described as “clean internalisation” in the paper as it involves the LP matching offsetting client flows without influencing rate or execution. FXPA says the LP should not use information to influence its pricing or trading and that trades should be executed under firm conditions, in other words, without last look. LPs should also not skew pricing or execution in anticipation of, or as a response to, market events.
Commercial flow offset is defined as the LP exiting its own risk against the client order, this can include positions in other parts of the business, delta-hedging flows, and, interestingly, if the LP’s principal stream is best price, or the LP is skewing to match with other client interest. On the latter, the paper stresses that LPs may skew prices but “must ensure such information is not leaked or used to influence client pricing beyond the bilateral transaction”.
It adds that “bilateral competition (e.g. in RFQ settings) should not result in price deterioration or cross-venue information dissemination.”
The paper further argues that matching client algo flow with another LPs disclosed streaming price and mid-book fills do not represent internalisation.
The paper concludes by stating, “Internalisation remains a powerful tool in FX markets when applied transparently and fairly. By clearly distinguishing between types of internalised liquidity and enforcing robust execution practices, the industry can promote confidence, reduce information asymmetry, and align with the highest standards of market integrity.
“The FXPA encourages all market participants – liquidity providers, venues, and asset managers – to adopt these definitions and practices to foster a more efficient and transparent FX ecosystem.”
The Full FX View
Anything that helps to clarify what internalisation should look like should be welcomed by the industry and the FXPA is to be commended to taking this step forward. While the paper offers solid definitions for what internalisation actually is, however, just as importantly, it sets out what it is not.
This will help participants root out those who claim internalisation when in fact they are leaking information to the Street and thus degrading execution quality. There is little doubt that any skew can have consequences – even internally – and as such it is good that FXPA is providing clients with the right questions to ask, namely, exactly where are you skewing? There will be clients within an LPs franchise that downstream liquidity and as such, any skew will show up eventually in the market – this paper highlights how any skew used for matching with a client algo order, should only be used for that order, this is something that can sometimes be forgotten according to sources.
Hopefully these guidelines will achieve wider adoption, notably, internalisation is a subject not covered to any great degree in the FX Global Code. Perhaps there is an opportunity for the GFXC to review the paper and, assuming it is comfortable with it, add it to the Code, maybe as a guidance paper similar to those on last look and pre-hedging? That will help get the guidance in front of as many people as possible and may, you never know, also help attract a few more signatories to the Code.
