The MSRB summarized guidance for dealers regarding "filtering" of bids and offers. MSRB determined that the summary was warranted "in light of developments in the use of alternative trading systems and the role of broker's brokers, as well as almost two years of experience since the implementation of MSRB Rule G-18, on best execution."
Filtering is a process in which a dealer screens out bids by certain dealers, which can be done by using automated tools available on an alternative trading system to identify and block bids from certain dealers, or by directing a broker's broker to limit the audience for a bid-wanted. While acknowledging that there may be legitimate reasons to block certain counterparties, the MSRB expressed concern that filtering could inhibit market access, lead to a reduction in liquidity and the quality of executions, and have a negative impact on prices paid and received by customers.
The MSRB directed dealers to a 2012 Notice outlining the fair-pricing duties of selling dealers that use broker's brokers. The Notice provides that a selling dealer must be able to demonstrate a reason for using filtering that is not anti-competitive. The MSRB also highlighted 2015 guidance that sets forth best-execution obligations in connection with filtering practices. The guidance includes examples of the appropriate applications of filtering, and explains that dealers "should have policies and procedures in place that govern when and how to: reasonably use filters without negatively impacting the quality of execution of non-[Sophisticated Municipal Market Professional] customer transactions; periodically reevaluate their use; and determine whether to lift them upon request." The MSRB further provided a list of questions for dealers to consider when creating and reviewing policies and procedures governing filtering practices.
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