Sub pennying is often not about making less than a penny between the bid/ask spread. It is about steping ahead of a real order by a minute amount. Say I am bidding 3000 aapl at 299.10. The sub pennyer will bid 3000 hidden .01 ahead of my order, once filled they will sell it out on another exchange at a higher price often pennys higher. Alot of time they are selling their stock to the original buyer who never got filled and is forced to either go to market or sweep the offer. If the sub pennyer gets filled and the market goes against him guess who gets filled?
A man picked up a lantern on the beach, rubbed it, and out popped the genie. She said, "I'll give you one wish." The man said, "I want to live forever." The genie told him that's one wish she cannot grant. The man thinks for a minute and says, "I want to live long enough to see the democrats pull their heads out of their asses." The genie said, "you crafty bastard!"
Au contraire; B-D internalization makes a mess of open and free markets. Just look at the muni bond market, where transaction costs are 1-2% simply due to slippage. You get to a point where everyone has to trade with their broker first, then the broker trades with the market. Abysmal. B-D internalization sub-pennying is orders of magnitude worse than flash in terms of its impact on the market and on customers. The SEC should indeed seek to ban this practice; it's just like flash, only: 1. Far more prevalent -- some issues exceed 80% internalized, whereas flash never accounted for more than maybe 3% of the market. 2. With flash there are potentially an unlimited number of bidders; with internalization there is only one -- your own broker. In an auction with only one bidder, the price doesn't tend to move much beyond the minimum bid, in this case .0001, a number very familiar to anyone with a broker that internalizes a lot.