The MSRB requested comments on draft interpretive guidance regarding two agency trading practices in the municipal market: (i) "pennying" and (ii) posting bids-wanted on multiple trading platforms.

"Pennying" refers to the practice of (i) a dealer posting a request for a bid on a customer's securities and (ii) the dealer eventually buying the securities itself by either matching the best bid received or beating that bid by an insignificant amount. According to the MSRB, over the long run, that practice may tend to injure customers because it discourages municipal firms from responding to requests for quotes since the firm asking for the quote always has what is, in effect, a "last look" right to pull back the securities and take them internally. The draft interpretive guidance would consider that the use of bids-wanted "(whether distributed via an [alternative trading system] or broker's broker) solely for price discovery purposes would be an unfair practice within the meaning of Rule G-17."

The MSRB stated that the practice of posting requests for bids on multiple venues may benefit investors since such posting would appear to improve execution for customers. However, the MSRB questioned whether such multiple postings would be misleading regarding how many bonds were up for sale in the market and, as a result, may deter aggressive bidding. The MSRB also raised the concern that the practice could create "a distorted sense of liquidity and a false impression of the depth of the market." The draft interpretive guidance would seek to clarify that a dealer does not need to post bids on multiple venues in order to satisfy its best execution obligations under MSRB Rule G-18.

The MSRB solicited comment on the appropriate treatment for the above practices under MSRB Rule G-17 (general rule of fair dealing) and MSRB Rule G-18 (obligation to obtain best execution). Comments must be submitted by November 6, 2018.

Commentary

The MSRB's request for comment on agency execution practices has ramifications that extend well beyond the munis market. Questions have been raised as to the benefits of internalization and last look in the equities markets and the currency markets. In the swaps markets, issues have been raised as to whether customers are really better off if their requests for bids must be broadly displayed or whether, in come cases, broad display can move the market away from the customer.

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