NYSE Euronext will on Monday launch a new electronic exchange for corporate bonds in an effort to win business from privately negotiated, or over-the-counter, markets.
The move is part of the exchange group’s bid to diversify its equity-dominated business into new types of securities.
The attempt could face an uphill struggle, however, as market veterans are sceptical about the new platform’s ability to attract much trading volume.
The new platform, based on NYSE Euronext’s electronic equity market, Arca, will offer live, anonymous trades for bonds issued by NYSE-listed companies.
John Holman, NYSE Euronext’s head of fixed income markets, said that by creating a centralised market where multiple dealers compete to provide the best prices, the exchange aimed to draw orders primarily from small investors.
“The corporate bond market is very fragmented and lacks transparency, so small investors are really beholden to the dealers. This model is designed to level the playing field,” said Mr Holman.
NYSE has had a bond trading platform for decades but it has suffered from low and declining trading volumes, partly because it has only offered bonds that are separately listed on the exchange in their own right. These represent only a tiny fraction of the bond market.
Mr Holman said the exchange would initially target small orders worth $100,000 or less – trades that represent about $600m of daily trading volume – although he hopes to attract larger trades next year.
While these small orders account for 77 per cent of transactions in the corporate bond markets, they represent only 2 per cent of dollar volumes, according to the National Association of Securities Dealers’ bond reporting system.
Investors, however, question whether an exchange model aimed at the retail market can be successful when bond trading is dominated by large institutions dealing privately with each other. They expect dealers to be reluctant to offer pricing on small orders of bonds.
Jim Kaufman, portfolio manager at ING Investment Management, said: “I don’t think that the market-makers are there for small-sized orders, so the retail investor is very disadvantaged.”
Currently, dealers selling small orders charge much more than those trading with big institutions. That gives retail-focused brokers little incentive to use an exchange where these margins could be threatened, Mr Kaufman said.