The Municipal Securities Rulemaking Board floated a "concept release" Monday that seeks market feedback on a potential initiative to collect pre-trade municipal bond data.
The release outlines a preliminary framework for pre-trade data collection and seeks input on benefits and burdens, as well as any alternatives that would not require rulemaking.
The potential framework indicates the MSRB may seek to collect data from a "subset of dealers," like brokers' brokers and alternative trading systems, a move praised by the Bond Dealers of America.
It's the first step in a process that may — or may not — lead to new requirements to disclose public pre-trade price information like live quotes, bid wanteds and responses to bid wanteds.
"It is the first step but that doesn't mean there's a second step," said John Bagley, the MSRB's chief market structure officer. "It's a chance for the market to come to us and lay out what they think would be good and what would be a cost."
The board will take comments until May 16.
The release comes after more than a decade of the MSRB's review of whether increased pre-trade price transparency would improve the municipal market's pricing mechanisms and liquidity. Unlike other markets, the municipal bond market has no public central repository for pre-trade data.
The MSRB's effort dates back at least to the Securities and Exchange Commission's 2012
The MSRB in 2013 sought market comments on the dissemination of pre-trade pricing data as well as other information through a central transparency platform, but dealers met the proposal with concerns that pre-trade data could be confusing to investors and potentially negatively impact trading strategies. The MSRB dropped the effort at the time, but didn't forget about it, said Ernesto Lanza, MSRB's chief regulatory and policy officer.
"The market wasn't ready," Lanza said.
Since then, the rise of alternative trading systems and other market changes have led to a significant increase in the amount of pre-trade activity. The lack of a free, public pre-trade data source has led to an "information asymmetry," the MSRB said in the release.
Lanza stressed the early stages of the process. "There's quite a bit that would have to happen before we're even close to any inkling on rulemaking," he said. "If we were to get to the point where we'd require something to be done, there would be at least another round of going to the market seeking comment on anything more concrete."
The MSRB's research on the topic, including a trio of research papers, "demonstrate the increasingly predictive value of pre-trade data for pricing bonds, a noticeable increase in the availability to certain segments of the market of pre-trade data over time, the continued lack of availability of this data to retail investors compared to institutional investors, and that the market is moving in the direction of greater electronification, making it increasingly easier to collect pre-trade data," the board said in the concept release.
The Bond Dealers of America said it's looking forward to weighing in on the proposal.
"BDA generally supports reasonable initiatives to improve market transparency, and we will consider the release from that perspective," said Michael Decker, BDA's senior vice president for research and public policy. "Based on an initial read, we are pleased that the release is focused on collecting quotations from ATSs and brokers' brokers and not directly from dealers."
