06.11.2019
By Rob Daly

FIMSAC Takes on Pennying

Pennying orders in the corporate bond market will become more difficult if the U.S. Securities and Exchange Commission’s Fixed Income Market Structure Advisory Committee has its way.

The advisory body voted to recommend that the SEC make a statement disapproving the practice in the corporate bond market, that Financial Industry Regulatory Authority publish a request for comment similar to the Municipal Securities Rulemaking Board’s September 7, 2018 request for comment regarding pennying, and that FINRA and MSRB coordinate their responses.

FIMSAC’s subcommittee on technology and electronic trading originally made its recommendation to the full advisory committee during its April 15 meeting but delayed its presentation due to concerns of painting the practice of “last look” by dealers as pennying.

Rick McVey, MarketAxess

Rick McVey, MarketAxess

“There was important feedback that the subcommittee received on the recommendation around clarifying the difference between pennying, the growing systematic use of the price discovery process on retail ATS systems to slightly improve the price of an auction in order for the dealer who initiated the auction to maintain that trade internally,” said Rick McVey, CEO of MarketAxess and chairman of the FIMSAC subcommittee. “The changes we have made are designed to clarify the practice of pennying, which we believe has a negative implications for long-term competition and pricing in the retail ATS markets versus the legitimate use and practice of last look by dealers who are trying to be sure to be responsible to their obligations for best execution on behalf of their client. We have made every attempt to clarify that last look is a valid practice for best execution even if used infrequently.”

FINRA plans to launch a study regarding pennying in the corporate bond market and canvas the trading venues for the necessary data, said to Thomas Gira, executive vice president, market regulation and transparency services at FINRA, during the teleconference.

“In conjunction with the MSRB, we have looked at munis, but we have not looked at corporates before,” he added. “This would just be to compare and see if we see similar conduct. Anecdotally, it is what we hear, though.”

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