FINRA Requests Comment on "Pennying" Practice in Corporate Bond Market

FINRA requested comment on "pennying" - the practice of a broker-dealer executing a customer order at a price that matches or only slightly beats (e.g., by a penny) the best auction price from a third party in the corporate bond market.

FINRA's request follows the recommendation by the SEC's Fixed Market Structure Advisory Committee ("FIMSAC"), which includes representatives of investors, issuers and other market participants, that FINRA seek comment on the practice of pennying. FIMSAC asserted that while the practice may appear to benefit customers (since the dealer is "providing at least as good a price as was obtained through the auction process"), it harms overall competitiveness in the long term because the practice may lead market participants to believe that submitting dealers are only using the auction process for price discovery purposes and will pick off for themselves any securities that appear attractively priced.

In its Notice, FINRA specifically requested comment on:

  • the definition of pennying and "last-look" practices;

  • what would constitute a meaningful price improvement after a submitting dealer views the prices obtained from a Request for Quote;

  • the consequences of pennying for market quality, particularly for auction competitiveness;

  • "blind bidding," a process by which dealers would not have the opportunity to review the auction responses of other firms before entering their own orders, as an "appropriate regulatory approach"; and

  • the differences, if any, between corporate and municipal bond markets that FINRA and the MSRB should account for.

Comments must be submitted by October 16, 2020.

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