The London Stock Exchange is to try to tempt private investors into the more esoteric – and risky – world of the derivatives markets by launching a covered warrants market next year.
Its proposals are yet to gain final approval from the Financial Services Authority, which is concerned that small investors might not know what they are getting into and might not understand the information presented by firms selling the warrants.
A warrant gives the purchaser the right to either buy or sell a security or basket of securities. They will typically be issued by financial institutions – such as invest- ment banks or stockbrokers. For small investors, it means that they will be able to buy investments that allow them to go "short" of the market – in effect selling ahead of an expected fall in share prices.
The only real way for retail investors to do this is to buy hedge fund investments, betting on the fund manager's ability to predict when the market might fall.
In addition, the warrants also allow investors to play the stock market with less money – trading on the marginal movement of the share price rather than having to pay for the entire price of the share.
Chris Broad, the head of new products at the London Stock Exchange, said that other markets in Europe, such as Germany and Switzerland, already have active trading in covered warrants, which have recently become popular with retail investors.
"We're responding to demand and competition from other large exchanges, and the changing retail environment," said Mr Broad.
The speed of introduction of covered warrant depends on when the UK Listing Authority, which moved from the London Stock Exchange to the FSA last year, approves the proposals. Mr Broad expects this to take place late this year.
The expansion is one of a series of innovations being proposed by Clara Furse, who became chief executive of the LSE earlier this year. She came from the derivatives market and was a board director of Liffe, the futures and options market.Reuse content