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.
* 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.