Why investors would likely benefit from public pre-trade information

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WASHINGTON – The pre-trade information available on alternative trading systems to broker-dealer participants would likely benefit all municipal securities investors if made more publicly available, the Municipal Securities Rulemaking Board’s chief economist said in releasing a report Thursday that is to be presented to a market structure advisory group next week.

“Potentially, pre-trade information could provide investors and all other market participants with important information that is currently only accessible to select market participants,” MSRB Chief Economist Simon Wu, one of the report’s authors said. “This information could improve pricing efficiency, investor confidence and market liquidity in the municipal market, but additional analysis and feedback from stakeholders is needed.”

The 27-page report, “Analysis of Municipal Securities Pre-Trade Data from Alternative Trading Systems,” obtained and analyzed quote data from two ATS’ with significant presence in the muni market for the period from Feb. 1 through May 31, 2015.

MSRB officials would not name the ATS’, saying they voluntarily provided pre- and post-trade data, including request for quote (RFQ) data or bids and offers wanted, live quotes and associated transaction data.

An ATS is an electronic trading system that provides a venue for matching the buy and sell orders of its participants, which can opt to remain anonymous in quotes. Most ATS’ are regulated as broker-dealers under the Securities Exchange Act of 1934 and the SEC’s Regulation ATS, adopted in 1998.

Pre-trade information is defined in the report as that which would indicate the size and price of prospective trading interest in specific muni securities. The access to this type of information is limited to market professionals and some data may only be available to market professionals involved in potential trades.

The report found, among other things, that the median difference in prices between customers buying munis in the market and the best offer quote on the ATS’ at the time of trade was 75 basis points, or $7.50.

The median difference in prices between customers selling munis in the market and the best offer quote on the ATS’ at the time of trade was 73 basis points or $7.30, it found.

On average interdealer trades occurred at the best offer price, according to the report.

Wu, who authored the report along with MSRB Chief Market Structure Officer John Bagley and Director of Research Marcelo Vieira, plans to present its findings at the Securities and Exchange Commission’s Fixed Income Market Structure Advisory Committee meeting Monday.

But he said more study is needed to make any definitive conclusions because of changes that have occurred since the 2015 data was examined. Today, there are more users of ATS’ including algorithmic traders and Institutional investors, as opposed to mostly broker-dealers in the past, he said.

The board is discussing the report and the need for further study of ATS data as its meeting here this week, an MSRB spokesperson said.

The report found that almost 70% of the all the trades in the muni market reported to the MSRB had a live offer quote, that is a quote available to ATS participants, on at least one or both ATS at the time of a trade execution.

Most live quotes were offer quotes to sell, as opposed to bid quotes to buy.

Over 90% of muni bonds with quotes had only one or two offer quotes on each ATS at any given time, according to the report.

Requests for quotes received a median of three responses, it said.

Seventy-five percent of RFQ’s did not result in a trade, the report found.

The report follows a concept release that MSRB published in July 2013 seeking comments on the potential benefits and burdens of providing pre-trade pricing information on a voluntary basis to be disseminated to the public through the MSRB’s EMMA website. Some commenters said this information is critically needed while others said it should not be provided because of questions of validity and that it could be confusing.

The concept release was published after the MSRB published a Long-Range Plan for Market Transparency Products in January 2012 that envisioned a new real-time central transparency platform that would over time evolve to become a venue to provide universal public access to pre-trade, concurrent/real-time and post-trade pricing information across the muni market.

The Government Accountability Office also issued a report in 2012 that found the lack of access to pre-trade pricing information in the form of bids and offers was a key barrier to individual investors independently assessing the quality of bids and offers they received from their dealers.

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Price transparency Bond pricing Primary bond market Secondary bond market SEC MSRB Washington DC
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