This paper examines how preferencing and internalization affect the quote-setting behaviour of risk-averse dealers who differ in their inventory. When competition is weak, both practices impede price competition and lead to wider markets spreads. However, in a highly competitive market internalization is detrimental to market spreads whereas preferencing is not any more.
LESCOURRET, L. and ROBERT, C.Y. (2005). Preferencing, Internalization and Dealer Inventory. In: Proceedings of International Conference on New Financial Market Structures. HEC Montreal, pp. 1-50.