Final

Preliminary Recommendations Regarding the Use of Last-Look 

in the Corporate and Municipal Bond Markets

The Technology and Electronic Trading Subcommittee (“Subcommittee”) of the Fixed Income 

Market Structure Advisory Committee (“FIMSAC”) was formed to consider the impact of

increased use of electronic trading platforms on the liquidity, efficiency and resiliency of the 

corporate and municipal bond markets. Although the increased use of electronic trading has had 

a variety of positive impacts on both the corporate and municipal bond markets, one troubling 

trading practice immediately came to the Subcommittee’s attention: the systematic use of lastlook, often referred to as “pennying”, by certain bond dealers.

Last-look occurs when a dealer purchases (sells) a bond for its own account, following the 

dissemination of a bid-wanted (offer-wanted) for a customer who is seeking to sell (buy) a bond. 

The dealer, after reviewing the auction information received, either matches the best price or 

executes the bond at a price that is slightly better than the best price. At first glance, this practice 

appears to benefit the customer, as the dealer is providing at least as good a price as was obtained 

through the auction process. But, over time, this practice harms competitiveness. For example, 

the use of last-look deters aggressive pricing or participation in the auction process by other 

dealers who fear that the submitting dealer is going to “step in front of” their winning prices or is 

otherwise using the auction process solely for price discovery purposes. Thus, competing 

dealers face diminished incentives to “put their best foot forward” or even submit a price into the 

auction. This last look process would also appear to give the submitting dealer an unfair 

advantage in the auction.

The Municipal Securities Rulemaking Board (“MSRB”), the primary regulator of the municipal 

bond market, expressed concern about this practice in the context of broker’s brokers trading in 

municipal bonds in a December 22, 2012 Notice to Dealers. The MSRB stated that the use of 

last-look by broker’s brokers solely for price discovery purposes and without a bona fide intent 

to trade harms the bid-wanted and offering processes by reducing bidders, thereby reducing the 

likelihood that the high bid in a bid-wanted will represent the fair market value of the securities. 

Unfortunately, the Notice to Dealers did not end this unfair practice in the municipal bond 

market. 

On September 7, 2018, the MSRB published a Request for Comment on Draft Interpretative 

Guidance on Pennying by not just broker’s brokers, but also by dealers on ATSs (“MSRB 

Request for Comment”). Therein, the MSRB states “[i]n recent outreach to a broad range of 

market participants, it has been suggested that pennying is prevalent in the municipal market and 

that widespread pennying does indeed disincentivize participation in the bid-wanted process, 

discourages bidders from giving their best price in a bid-wanted and may impact the efficiency 

of the market.” Accordingly, the MSRB requested comments on its proposal to extend the 

December 22, 2012 Notice to Dealers and its guidance on the use of last-look in the context of 

broker’s brokers to the use of last-look following a bid-wanted distributed via an ATS. The 

MSRB stated it wants to “make clear that, depending on the facts and circumstances, the use of 

bid-wanteds (whether distributed via an ATS or broker’s broker) solely for price discovery 

purposes would be an unfair practice within the meaning of [MSRB] Rule G-17, and that the 

repeated practice of pennying would be indicative of having the sole purpose of price discovery.”
Final

The Subcommittee applauds the recent MSRB Request for Comment as the right step towards 

curbing this abusive practice in the municipal bond market. However, the Subcommittee 

believes that last-look is not exclusive to the municipal bond market, but is also utilized by 

certain dealers in the related, and much larger, corporate bond market. The Subcommittee 

believes that anytime the initiator of an electronic fixed income order utilizes competitive RFQ 

responses to provide an advantage to one of the respondents through the use of last-look, the 

long-term implications for market structure and market fairness are negative.

As the MSRB has no jurisdiction over the corporate bond market, the Subcommittee believes 

that the Securities and Exchange Commission (“SEC”) should encourage the Financial Industry 

Regulatory Authority (“FINRA”), the primary regulator of the corporate bond market, to follow 

the MSRB’s actions and issue a similar request for comment from corporate bond market 

participants. The Subcommittee recognizes that these two markets are not identical, but they do 

have many similarities. With the MSRB now addressing last-look, a coordinated response to this 

practice is warranted to preserve the integrity of both of these important markets. 

Recommendation: The Subcommittee recommends the following actions to correct abusive use 

of the practice of last-look:

(1) FIMSAC requests that the SEC make a statement disapproving of the repeated use of 

last-look in either the municipal or corporate bond markets on any electronic trading 

venue, as the practice harms price discovery and market efficiency. The SEC should 

consider setting the clear expectation that the use of last-look should occur only in the 

rare situation when the dealer does not receive any reasonable response to an auction

request and/or needs to use the practice to conform with its best execution 

responsibilities. The practice should not be part of the dealer’s everyday normal business 

practices. Furthermore, the SEC should encourage dealers to have clear policies and 

procedures in place delineating when last-look may be used.

(2) The SEC should encourage FINRA to publish a request for comment on the use of lastlook in the corporate bond market, similar to the September 7, 2018 MSRB Request for 

Comment. The SEC should encourage FINRA and MSRB to expand its review of lastlook to cover all electronic trading venues rather than limit specifically to ATSs. Finally, 

the SEC should encourage FINRA and MSRB to coordinate their respective final 

responses.