Preliminary Recommendation Regarding Investor Education Around Secondary Market Liquidity in the 

Corporate Bond Market for Retail Notes

The Corporate Bond Transparency Subcommittee (“Subcommittee”) of the Fixed Income Market 

Structure Advisory Committee (“FIMSAC”) examines how pre-trade and post-trade transparency affect 

the corporate bond markets. Following extensive research, the Subcommittee found that secondary 

market liquidity in retail notes, such as InterNotes, is low in comparison to the liquidity in bonds issued 

by the same issuer to institutional investors. The Subcommittee recommends additional efforts to 

educate retail investors about the cost of secondary trades in retail notes, as described further below. 

Background: InterNotes are corporate bonds that many issuers (See Figure 1) sell directly to retail 

investors, thereby allowing the investors direct access to primary transactions and allowing the issuers 

direct access to individual investors. Figure 2 compares the broad characteristics of InterNotes with 

institutional bonds. Another similar type of retail oriented bond referenced in Figure 2 are ‘Baby bonds’. 

These trade on the NYSE and are not further addressed in this note. InterNotes have several features 

designed to appeal to retail investors. These typically include:

• Regular issuance (typically weekly), priced at par.

• Yield enhancement due to a callable feature. 

• A survivor option that allows beneficiaries of the original buyer to put the bond back to the 

issuer at par (under certain circumstances) following the death of the original buyer. 

Prior studies have shown that secondary market trading costs of retail size transactions are significantly 

higher (about four times) than trading costs for institutional sized transactions on the same bond issue. 

Figure 3 provides transaction cost statistics for retail and institutional size trades over 2006-2016.

Similar to these studies, we find that the trading volumes and average trade size in InterNotes are much 

lower than that in institutional bonds of the same issuers (Figures 4 and 5), and trading costs are much 

higher (Figure 6). Moreover, as shown in Figure 7, the transaction costs for InterNotes are higher than 

institutional bonds of the same issuer even when we restrict the comparison to small retail sized trades 

(< $100,000). We believe this may be due to the bespoke nature of InterNotes along with their lower 

issue sizes (Figure 8, typical issues have sizes in the millions compared to same issuer institutional 

offerings which are in the billions). 

Recommendation: We feel it is important that investors in these notes fully understand the liquidity 

and other risks associated with them. The FIMSAC recommends that the SEC and FINRA educate retail 

investors on the uses, characteristics, and risks of retail notes. The initiative should identify the 

embedded issuer call option and survivor put options that are typical in these notes along with other 

options that may have an impact on the pricing of these notes. In addition, investors should be made 

aware of their lower secondary market liquidity compared to similar securities from the same issuer. 

These objectives might be accomplished through the issuance of an “Investor Bulletin.” FIMSAC leaves 

the final form as well as content of the education to the discretion of the SEC and FINRA.
Ally Financial

Bank Of America

Calvert Impact Capital

Capital Impact Partners

Caterpillar

Citigroup Inc.

Credit Agricole CIB

Credit Suisse

Deutsche Bank

Discover Financial Services

Dow Chemical

Farmer Mac

Federal Farm Credit

Ford Credit

GM Financial

Goldman Sachs

IFC

John Deere

Morgan Stanley

NRUC

Prospect Capital

Prudential

RBS

Societe Generale

TVA

Verizon

World Bank

Fig 1. InterNotes issuers. Source: Incapital.

Fig 2. Characteristics of InterNotes, compared to institutional notes. 
Fig 3. Comparison of transaction cost for retail vs institutional trades in corporate bonds. Source: Table 3 from 

Bessembinder, H., Jacobsen, S., Maxwell, W., and K., Venkatraman 2018, Capital Commitment and Illiquidity in 

Corporate Bonds, Journal of Finance, Vol LXXIII, No. 4, 1615-1661.

Par Value in $MM per Day Number of Trade per Day Par Value per Trade in $

Age

Customer 

Sell

Customer 

Buy

Customer 

Sell

Customer 

Buy

Customer

Sell

Customer 

Buy

<=1yr 0.4 1.4 10 46 41871 31124

1-3yr 0.8 0.8 23 35 32918 21556

3-5yr 0.6 0.6 21 29 27473 19870

5yr+ 0.5 0.5 25 31 21348 17238

Fig 4. Daily trading statistics for InterNotes from 01/2010 – 05/2019. Source: Calculation based on TRACE 

database.

Par Value in $MM per Day Number of Trade per Day Par Value per Trade in $MM

Age

Customer 

Sell

Customer 

Buy

Customer 

Sell

Customer 

Buy

Customer 

Sell

Customer 

Buy

<=1yr 131 135 105 220 1.3 0.6

1-3yr 74 78 151 220 0.5 0.4

3-5yr 30 31 89 131 0.3 0.2

5yr+ 27 29 108 110 0.3 0.3

Fig 5. Daily trading statistics for institutional bonds of the same issuers from 01/2010 – 05/2019. Source: 

Calculations based on TRACE database.
Fig 6. Average transaction costs for all InterNotes vs institutional notes from the same issuers from 01/2010 –

05/2019. Source: Calculation based on TRACE database.

Fig 7. Average transaction costs on InterNotes compared to institutional bonds of the same issuers from 01/2010 –

05/2019 (transactions < $100,000 only). Source: Calculation based on TRACE database.

avg Issue Size Institutional (in $Bn) InterNotes (in $MM)

Overall 1.6 6.1

BAC 2.2 15.4

C 1.8 3.1

CAT 0.7 3.3

CS 2.0 1.5

DB 1.1 2.2

DE 0.6 23.6

DFS 0.7 3.5

DOW 0.9 4.6

F 1.2 10.3

GM 1.1 6.3

GS 2.3 8.7

MS 2.4 4.0

NRUC 0.5 3.4

PRU 0.8 20.3

RBS 1.7 3.8

VZ 3.4 11.3

Fig 8. Average issue size for InterNotes compared to institutional bonds from the same issuer from 01/2010 –

05/2019. Source: Calculation based on TRACE database.