Dealers rebut UK covered warrants market flop claims

“It would be unrealistic to expect the level of trading in the UK, three months after launch, to be anywhere near the levels seen in continental Europe,” said the dealers in a letter to the Financial Times today, published in response to one of its articles entitled ‘Brokers brand covered warrants a high-profile flop’.

“Judging by the level of interest that existing and new customers have shown in covered warrants, plus the steady growth in trading since launch, we are confident that the market has a future in the UK,” the dealers added. The latest volume figures from the LSE show that for the week ending January 20, the 13th week of covered warrants trading, 520 trades took place on a notional value of £1.3 million. The market's first week of trading after its October 28 launch witnessed 147 trades on a notional value of £886,000.

The authors of the letter, Neil Jamieson of Comdirect – a subsidiary of Commerzbank - Mark Valentine of Goldman Sachs, Toby Peters of JP Morgan, Charles Annandale of SG and Gian Luigi Pedemonte of Tradinglab, a subsidiary of UBM, the investment banking arm of Unicredito Italiano, said it would take retail investors time to understand how the product can be used to enhance or protect returns from a portfolio.

A covered warrant is a type of equity option issued as a security by a party other than the issuer of the underlying asset. It is aimed mainly at retail investors and gives the holder the right to buy or sell the underlying at a certain price over a specified period.

“Think how many investors – in particular those close to retirement – could have benefited, by taking out insurance on the value of their portfolio by buying a put warrant on one of the major UK or US indexes, thus protecting the value of their equity investment in a falling market,” said the dealers, adding that the brokers that see the market as a "high-profile flop" are, “frankly a little hasty in their judgement”.

“The description is hardly apposite for a market that already offers retail investors the choice between more than 300 covered warrants on individual stocks and indexes,” said the dealers, concluding that the breadth of offering is what they, along with the LSE, would characterise as a "gradual build".

At the end of last year, brokers reported minimal trading volume in UK covered warrants.

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