Retail bond market for UK investors
On 1 February, the London Stock Exchange launched its order book for retail bonds. Opened in response to increasing demand from private investors in the UK, the initiative aims to make trading in bonds as straightforward as trading in shares by offering continuous, transparent electronic access to a range of UK gilts and corporate bonds for the first time. The market is supported at launch by three dedicated market-makers, and initially offers trading in 60 of some of the most recognisable fixed-income securities currently listed in London.
There is already an active and established retail investment culture in Continental Europe. (London Stock Exchange Group’s Italian MOT market is the biggest retail bond market in Europe, with over 3.5 million trades in 2009). Nevertheless, while London is renowned as a global centre for the listing and trading of debt, the secondary market there has long been almost entirely institutional. Retail investment has typically been through bond funds, and the off-book nature of the secondary market has made it particularly difficult for private investors looking to incorporate fixed-income products into their portfolios.
Furthermore, this institutional structure has seen corporates often shying away from issuing smaller chunks of debt in the UK market. Of the 10,000 or so corporate debt securities listed on the London Stock Exchange’s markets, only around 1,000 have lot sizes of under £50,000. Issuers have been reluctant to issue in retail sizes when the retail audience has not been immediately accessible. But issuing bonds to a retail audience can be an efficient and cost-effective way to raise debt funding. Indeed, in the absence of a retail bond market in the UK, several British issuers have issued bonds on Italy’s MOT platform, such as Barclays which has bonds worth €500 million outstanding, with coupons ranging up to 6 per cent.
A key aim of the new market in London is to encourage that culture in the UK by fostering appetite among issuers to target a large and growing British retail audience who will now get easy access to bonds. Its launch marks the introduction of a mechanism which gives straightforward two-way access between issuers and private investors, and provides an alternative to the existing, indirect and often frustrating route to fixed income exposure for individuals. And the underlying retail appetite does exist in the UK – volatile equity markets and low central bank interest rates have stimulated retail interest in fixed income, and the Association of Private Client Investment Managers and Stockbrokers (APCIMS) estimates that the value of bond trading among retail investors in corporates alone was £20 billion in 2009. There is also potential for it to grow much further. Turnover on MOT was €230 billion in 2009 and there is no reason to believe that, in time, similar levels cannot be reached in the UK as the right tools become available.
As private investors see the benefits of electronic bond trading, the London Stock Exchange fully expects to see interest from issuers grow in turn. Building on the success of its MOT issuance, RBS issued a retail-sized bond specifically for trading on the new order book when it launched on 1 February. The London Stock Exchange has subsequently seen interest for other potential new issues, and fully expects to see newly issued securities trading on the platform in the coming weeks and months. Furthermore, discussions are taking place with a view to adding more market makers, and to making bonds already listed in retail sizes available for trading on the order book shortly.
Changing the existing investment culture in the UK will take time, and the scale of the ambition means the success of the market will be measured over years rather than months. It is also vital that the necessary education is conducted as a joint effort. Working together with its stockbroking, market making and issuer clients, the London Stock Exchange already has a dedicated resource website and is conducting a series of seminars in cities around the UK to this end.
For London Stock Exchange Group itself, the launch of the new market represents an important step in remaining a competitive and innovative force in a rapidly changing European landscape. Along with ambitions in the post-trade and derivatives arenas, this launch reiterates how the Group continues to become an increasingly diversified business, while responding to demands from its key clients across multiple asset classes.