By Dena Aubin and Lucia Mutikani
NEW YORK, April 13 (Reuters) - Online corporate bond trading is getting a new push from the New York Stock Exchange, though its bid to create an equity-like market for the bonds could face tough hurdles, market veterans say.
Using the same design as its electronic equity market Arca, the exchange is replacing its existing corporate bond trading system with a new platform offering firms live, anonymous trades, to be rolled out later this month.
By creating a centralized market where multiple dealers are competing, the NYSE hopes to provide the best price on bonds for small investors, who make up about 65 percent of all corporate bond trades, said John Holman, head of fixed-income markets at the NYSE Group Inc. (NYX.N: Quote, Profile, Research), which operates the exchange.
"We are focusing on corporate bonds because they are most closely in line with our listed companies, so we can trade the entire balance sheet of our customers," he said, noting the goal is to capture 25 percent of retail trading within a year.
Corporate bonds of all NYSE-listed companies will be eligible for trading, raising the number of bonds from about 1,000 currently to as many as 6,000 in the future, NYSE said.
NYSE is not the first to attempt an anonymous electronic exchange for corporate bonds. BondBook, formed in 2001 by a group of leading Wall Street bond dealers, closed that year when it failed to attract business to its system.
Creating an exchange is difficult in the corporate bond market because very few bonds trade continuously, market professionals say.
With the average corporate bond trading just once a quarter, "it is very rare that a customer buy order matches a customer sell order in the same bond at the same time," said Richard McVey, chief executive of MarketAxess Holdings (MKTX.O: Quote, Profile, Research), the dominant player in electronic trading of corporate bonds.
Still, if the NYSE can find motivated market-makers, it may be able to create a better market environment for retail, or individual investors, he said.
"From our perspective, anything that promotes transparency and efficiency and liquidity in the corporate bond market is a good thing," McVey said.
Though online bond trading has grown in recent years, the most successful systems mimic the way bonds have traditionally been bought and sold -- through negotiations between traders over the phone.
MarketAxess, for example, uses a "request-for-quote" system where investors can ask for quotes from several dealers to buy or sell bonds, and then execute a trade in a specified time. The company, which focuses on institutional trades, handled about $195 billion in U.S. investment-grade corporate bond volume last year, up from $178 billion in 2005, according to its Web site.
NYSE REPUTATION A PLUS
Yet some professionals see room for another platform catering to small investors.
"I do see (bond trading) going towards more of a centralized marketplace concept," said Rich Lee, head of fixed-income trading at New York brokerage Wall Street Access, which plans to make markets on the NYSE system. "I think they're going to fill a huge void."
The NYSE's track record with electronic trading of stocks is another plus, others said.
"The fact that the New York Stock Exchange will be in charge of this will lend a credibility to the system, and the technology should allow them to trade these bonds at a reasonable spread," said Lewis Altfest, president of New York money management firm L.J. Altfest & Co.
Small investors' interest in corporate bond trading has grown since regulators have made more pricing information available, said John Pigott, chief executive of ValuBond, an online trading firm in Atlanta catering to individual investors.
Broker-dealer regulator NASD, for example, introduced a bond price reporting service for corporate bonds in 2002 and is now reporting trades on all high-grade and high-yield bonds.
Pigott questioned, however, how the NYSE's system will improve trading for individual investors, given that so much pricing information is already available.
"I welcome them to the market," Pigott said. "I am just not certain what problem they are trying to solve."
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