February 1, 2010 2:46 pm

LSE launches bond-trading for private investors

Private investors can now trade individual UK corporate bonds in deal sizes as low as £100, following the launch on Monday of the London Stock Exchange’s new electronic order book for retail bonds.

From today, stockbrokers will be able to use the order book to enter buy and sell orders on behalf of clients in the same way that they do for share dealing. For the first time, continuous two-way pricing will be provided by market makers – including Evolution Securities, ABN Amro and Shore Capital – in increments of £1,000 or less.

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Initially, 10 corporate bonds will be available for trading. These include bonds issued by Tesco, BT, National Grid, GlaxoSmithKline, Morgan Stanley, GE Capital, Enterprise Inns and a new bond issued specifically for the retail service by Royal Bank of Scotland. Brokers will be able to see live prices on-screen, and trade from the market’s initial opening auction through until the market close.

In addition, the order book will allow brokers to place trades in 49 government bonds, or gilts, with a minimum deal size of £1.

Until now, private investors have not been able to trade corporate bonds through online stockbroking services, and have instead had to deal by telephone in minimum sizes of £10,000-£50,000 per bond. Writing in the FT last year, columnist and private investor Nick Louth observed: “Once you start to shop for corporate bonds, you realise what a wilderness it is for the private investor. None of the three brokers I use was able to provide online dealing facilities or online prices. I spoke to had little knowledge of the market, had no lists of bonds they could deal in, nor an easy way to relay prices.”

According to the London Stock Exchange, the retail order book has been introduced in response to “strong private investor demand” for greater access to fixed income investments. Killik and Co – one of the brokers that will be using the order book from launch – expects that its clients will welcome the move. “There has been growing demand from our private investor customers to access the corporate bond market but, until now, a centralised, transparent order book for trading in individual retail-friendly sized bonds has not existed, said senior partner Paul Killik. “We look forward to providing our customers with an entirely new type of access to fixed income markets.”

In Europe, retail investors already trade €230bn-worth of bonds every year on Borsa Italiana’s MOT market. Royal Bank of Scotland, which issued a series of its Royal Bonds for the Italian market, has now launched the first new bond for the London Stock Exchange order book, with a ten-year duration and a fixed-interest coupon of 5.1 per cent. It can be traded on the order book in deal sizes of £100, with a bid-offer spread (the difference between the quoted buying and selling price) of 0.75 per cent. In the past, private investors dealing in other corporate bonds have been quoted bid-offer spreads of up to 5 per cent.

”The LSE’s development of a similar market in the UK is a great advance and enables RBS to provide more and more British investors with the same opportunities, with the same small denominations and the same tight spreads,” said head of sales Andrea Sozzi Sabatini.

Simon Fine of market-maker Shore Capital Group said: “Retail bonds have proved to be an enormous success in the US and other jurisdictions and we believe they have great potential here in the UK.”

However, some financial advisers questioned the suitability of individual corporate bonds for private investors. “You need to understand senior and junior debt,” said Mark Dampier of Hargreaves Lansdown. “You need to know where a bond is in the pecking order. If you look at bond fund managers, they’ve got analysts and lawyers looking at all the caveats. “

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