London Stock Exchange launches e-trading for retail bonds

The London Stock Exchange has launched an electronic trading platform for retail bond investors. The facility opened in February and offers private investors continuous two-way pricing for a limited number of UK corporate bonds and gilts available in small denominations.

Forty-nine gilts and 10 corporate bonds are available for trading, including securities issued by Royal Bank of Scotland, Morgan Stanley, Tesco, BT, National Grid, GlaxoSmithKline, GE Capital and Enterprise Inns.

RBS initiated the first primary issue through the platform, with a bond that is available in lot sizes of £100. The 10-year bond has a nominal coupon of 5.1%.

There is no official minimum trade, but LSE’s product manager for fixed income, Gillian Walmsley, says the focus is on trading denominations of £1,000, although £5,000 and £10,000 denominations are under consideration.

As of February 9 there had been eight trades in gilts, and one trade on a bond issued by GlaxoSmithKline.

The exchange was closely modelled on Borsa Italiana’s trading platform for retail fixed income investors. The Italian exchange (acquired by LSE in 2007) traded €230 billion of bonds to retail investors in 2009, making it the biggest market of its kind in Europe.

Walmsley says similar trading volumes will take longer to achieve in the UK, because retail investors have traditionally focused on equity rather than fixed income.

Walmsley says there is longstanding demand from investors for easier access to the bond markets, who could previously only access UK-issued bonds through bond funds or by going over-the-counter through a stockbroker.

The LSE plans to encourage greater numbers of investors to participate by providing them with basic information regarding what bonds are and how they function.

One of the key trends of 2009 saw retail investors moving out of the more volatile equity market into bonds. With interest rates still at historically low levels, the ability to achieve better returns than is available on bank accounts may see the trend continuing in 2010.

The LSE official says the new platform will make bond trading as “easy as trading shares”. In particular, finding the right price should be less arduous, as buy and sell prices will be constantly updated.

The official also says the corporate bonds listed on the platform were issued by liquid, household names. Although the principal reason for setting up the platform was to meet investor demand, he says there is strong interest from issuers to meet this. Walmsley says the platform will feature extra securities in “a matter of weeks”, and will be joined by more market-makers in the next couple of months.