October 15, 2020

Via Electronic Mail ([email protected])

Ms. Jennifer Piorko Mitchell
Office of the Corporate Secretary
FINRA
1735 K Street, NW
Washington, D.C. 20006-1506

Re: FINRA Regulatory Notice 20-29; SIFMA Comment Letter in Response to FINRA’s Request for Comment on the Practice of Pennying in the Corporate Bond Market

Dear Ms. Mitchell:

The Securities Industry and Financial Markets Association (“SIFMA”)1 submits this letter to FINRA in response to the above-referenced request for comment on the practice of pennying in the corporate bond market.2 While SIFMA agrees that conceptually pennying could be problematic, FINRA’s data shows the practice of pennying is uncommon in the corporate bond market. Thus, any proposals to stop pennying are solutions in search of a problem that does not currently exist in fixed income markets. For this reason, the costs with requiring a substantive rule that would force firms to develop significant compliance programs and create unnecessary complications would far outweigh the benefits of a rule to curb the potentially problematic practice of pennying. We reiterate SIFMA’s comments3 in response to the MSRB’s 2018 request for comment on the practice of pennying in the municipal bond market, which we have attached to this letter for your reference. Further, despite our belief that the practice of pennying does not appear to be a problem in the corporate bond market, we provide the following comments in response to FINRA’s questions in the request for comment.

Overview and Background

After a FIMSAC recommendation,4FINRA conducted a review of electronic auction and execution practices and published this request for comment. FIMSAC recommended FINRA publish a request for comment on the use of “pennying,” which FIMSAC defined 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 further distinguished pennying from “last look,” which FIMSAC defined as a valid practice of a dealer reviewing auction responses as part of the dealer’s best execution process and internalizing the order with meaningful price improvement. FINRA’s study found that firms internalized the order after a Request for Quote (“RFQ”) auction 13% of the time.5 Approximately 2% of these executions were based on internal bid prices that did not improve the best external bid and 6% improved the best external bid by 25 basis points or less.6 Lastly, FINRA identified firms that commonly failed to significantly improve on the best external bid when internalizing trades.7

Pennying Is Not a Prevalent Problem in the Corporate Bond Market

While some claim that the practice of pennying could theoretically harm overall RFQ auction competitiveness, despite directly benefiting individual investors, the FINRA data does not suggest that the pennying is a prevalent problem that warrants a prescriptive rule. Considering firms internalize less than 9% of orders after a RFQ auction—which could consist of only the legitimate practice of last look—FINRA’s data shows that pennying is not actually a common problem in the corporate bond market. Our discussions with SIFMA members have confirmed this conclusion – our members do not believe pennying in corporate bonds is common or a problem for the market; if it does happen, it is isolated. Further, considering FINRA could identify those firms who appear to frequently only provide minimal improvements to the best external bid when internalizing trades, FINRA can utilize existing rules to prevent the potentially troublesome practice of pennying. Thus, we request FINRA to use existing rules and supervisory measures to curb any troubling practices and avoid creating a prescriptive rule that will result in significant industry cost to develop surveillance programs to comply with a rule that provides limited benefits.