January 10, 2023 | Stamford, CT — Investing in individual bonds is an attractive alternative to mutual funds and ETFs for the first time in a decade, and the opportunity exists to meet that demand.

With risk-free returns of 4% or more, holding individual bonds to maturity can give investors what they have dreamed of for at least the past decade—a true fixed income. Nevertheless, retail investors are missing opportunities due in large part to the challenges associated with buying bonds. 

“Trading bonds should and could be as easy for retail traders as it is for them to trade ETFs or stocks,” says Kevin McPartland, Head of Research at Coalition Greenwich Market Structure & Technology and author of Understanding the Structure and Opportunity of Retail Bond Trading. “The banks, wealth managers and technology providers who can help eliminate the complexities that limit retail participation in direct bond investing will reap huge rewards.”

While both liquidity and technology have improved for retail bond trading over the past few years, a huge opportunity for progress still exists. Despite significant innovation, retail investors still look to human advisors to handle the vast majority of their bond orders. Conversely, most financial advisors, nearly 80% of those participating in a recent Coalition Greenwich study, ultimately execute those trades electronically. 

The bond market will evolve to feature many of the same tools that make trading equities and ETFs so easy. For example, easier to use bond selection tools supported by liquidity aggregation technology that unearths market depth and pricing from multiple sources. These platforms could even allow retail investors to buy bonds based on issuer, not just yield and rating, following the path often taken for single stock selection.

The first step, however, is putting that functionality in front of financial advisors. Although the quality of the portfolio construction, research and pricing tools within advisor platforms has improved dramatically, there is much more work to do. 

“Going forward, we see a huge opportunity for the technology provider who can make the quantum leap forward, obfuscating the complexities of the bond market, where appropriate, in an effort to simplify access and ensure the engine inside provides the best bonds at the best prices,” says Kevin McPartland. 

Understanding the Structure and Opportunity of Retail Bond Trading analyzes retail demand for fixed-income investments and examines the ways retail investors trade bonds, including a detailed look at the most widely used trading venues and electronic trading systems. The report also documents the impediments that limit retail direct investment in bonds and identifies the opportunity available to financial advisors, technology providers and other market participants.