What Is a Bid Wanted?
A bid-wanted is an announcement made by an individual who is seeking a price at which to sell a security or asset. This does not mean that the seller is committed to making a sale but rather that they are willing to hear potential offers from select parties. Typically, a broker will be involved in placing a bid-wanted announcement. The broker's role is to set the sale parameters, collect bids, and negotiate the sale terms on behalf of the seller in exchange for a commission or fee. Bids-wanted are a popular practice in the municipal bond market.
An investor's call for bids signifies their intent to sell a financial instrument, commodity, or currency. This announcement welcomes price proposals from potential buyers. Subsequently, prospective parties can engage by submitting their bids. The bid-wanted announcement is an initial step in the selling process and may instigate negotiations concerning the final sale price.
How Does a Bid Wanted Work?
Utilizing a bid-wanted announcement may not guarantee the highest sale price for a financial asset, but it offers a heightened level of confidentiality. This privacy proves vital for sellers seeking to discreetly adjust their financial positions. Bid-wanted announcements find favor when investors prefer not to directly solicit bids for securities, opting to engage a broker's services.
Brokers, whether individuals or firms, assume a pivotal role in this process, charging a fee or commission for their assistance. Collaborating with the seller, they establish pricing boundaries for the asset, be it a security, commodity, or currency. Identifying potential bidders, brokers selectively disseminate the bid-wanted announcement, avoiding broad market exposure.
The broker's mission is to maximize the sale price, promptly communicating to bidders if their offers deviate significantly from set parameters or seem erroneous. Each bid specifies both the price a prospective buyer is willing to pay and the quantity they wish to acquire. Additionally, the broker conveys the highest bids to the seller.
The bid-wanted announcement includes the designated bid acceptance period and the time when the winning bid will be honored, commonly referred to as "firm time." In volatile market conditions, firm time holds greater significance for sellers. A longer interval between bid submission and honoring allows more opportunities for bid revisions by the buyer.
Exploring Bid Wanted and Municipal Bonds
The term "bid wanted" is often encountered in the municipal bond market. One of the popular platforms for municipal bond trading offered by Bloomberg is Muni Bid Wanted.
Since municipal bonds lack a centralized clearinghouse, transactions occur through direct negotiations between buyers and sellers, often with a dealer serving as an intermediary for the seller. Sellers initiate the trade by announcing their desire for bids on specific bond types. This triggers a bid-wanted auction, yielding a list of submissions. Subsequently, the dealer evaluates whether to accept any of the offers.
Even if a bid ranks as the highest, a municipal bond dealer can decline it if it appears insufficient. Instead, they may opt for internalization, purchasing the bond from the seller themselves in a process known as a "last look."
Bid Requests and Unfair Practices
The bid-wanted auction process, with its bilateral nature, has raised concerns among municipal bond market observers regarding favoritism. Calls for reform of the market structure and trading methods have emerged. In 2019, the SEC Fixed Income Market Structure Advisory Committee released a statement denouncing the misuse of the internalization process known as "pennying."
Pennying occurs when a dealer, after reviewing auction information from a bid-wanted request, either matches the best price or slightly improves it by a penny. Initially, this practice may seem advantageous to customers as the dealer offers a price equal to or better than that obtained through the auction. However, the Committee argued that over time, this practice hinders market competitiveness.
Systematic internalization of orders through pennying discourages aggressive pricing and dealer participation in the auction process. Competing dealers become apprehensive that the submitting dealer will intervene with their winning prices or exploit the auction solely for price discovery, diminishing their incentive to provide competitive bids. This process also bestows an unfair advantage on the submitting dealer in the auction.
Bid-wanted announcements are a crucial aspect of trading various financial assets, allowing sellers to discreetly explore price offers. Brokers play a pivotal role in this process, assisting in setting parameters and facilitating negotiations. The municipal bond market frequently utilizes bid-wanted requests, and while they enhance privacy, concerns about unfair practices such as pennying have prompted calls for market reform. Transparency and fairness in the bid-wanted auction process remain important considerations in modern financial markets.