Earlier quoted context omitted.
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…
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.
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