On August 17, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 20-29 to request comment on the practice of internalizing customer trades in the corporate bond market after obtaining auction responses, commonly known as “pennying.” The Securities and Exchange Commission’s Fixed Income Market Structure Advisory Committee (FIMSAC) defined “pennying” as a practice where a dealer initiates a bid or offer-wanted auction process on behalf of a customer, reviews the auction responses, and then executes the customer order itself at a price that either matches or slightly improves the best-priced auction response. FIMSAC stated that pennying may appear to benefit a customer but may harm overall auction competitiveness over time.
FINRA reviewed corporate bond auctions conducted by retail firms on electronic trading platforms and found that firms internalized executions at varying rates after initiating auctions, and that these internalized executions offered varying amounts of price improvement. Consistent with a recommendation from FIMSAC and a similar request for comment published by the Municipal Securities Rulemaking Board, FINRA is soliciting comment on when such executions reflect a practice of pennying, how pennying impacts market quality and whether further regulatory action would be appropriate.
FINRA encourages all interested parties to comment on the proposal. Comments must be received by October 16. The Notice is available here.