June 15, 2018 / 3:08 PM / a month ago

U.S. loan market slow to adapt to electronic trading even as volume rises

NEW YORK (LPC) - Electronic loan trading volume is rising in the US$1trn US leveraged loan market, but these trades still make up just a fraction of overall activity as many participants have yet to embrace the technology. 

About US$5bn of loan trades have been completed in the last 12 months on Bank of America Merrill Lynch’s Instinct Loans platform, about even with the prior year, which was introduced two years ago.

MarketAxess, a multi-dealer system, said trade volume in the first quarter jumped more than 123% year-over-year, but activity was still just US$643m for loans compared to US$47bn for high-yield bonds.

Electronic trading across investments increased as banks pulled back from making markets due to regulatory pressure, and new platforms offered liquidity by facilitating multiple offers. While other asset classes have started to use electronic systems, most loan trades are still completed over the phone, although lenders are positive about their future use. 

“If you look at loan trading, and all credit and fixed-income trading, electronic trading is a huge focus for clients, and more and more clients are looking at electronic [platforms],” said Alex Naboicheck, head of US par loan trading at BAML. “The [Instinct Loans] system continues to be successful and client adaption has continued.”

More than US$714bn of loans were traded in 2017, up almost 14% from 2016, according to IHS Markit, which includes transactions entered into before new-issue loans were completed, but only a small fraction were completed electronically.

Platforms can create more liquidity and streamline trading, but some participants say their firms do not do enough volume to warrant using an electronic system, or are afraid of trading away from arrangers who can dictate future new-issue allocations.

COTTON ANNIVERSARY

BAML’s Instinct Loans, which started trading in June 2016, promised to deliver liquidity to the US leveraged loan market by offering two daily, thirty-minute trading sessions that allow multiple participants to bid on a specified number of loans.

While almost US$5bn of purely electronic trades was completed on Instinct in its second year, about another US$2bn traded as voice follow-ups to inquiry initiating from the platform. During that period, 276 different loans were bid or offered during the sessions.

The bank said 15 clients executed 20% or more of their total yearly trading volume through Instinct.

BAML added new features last year, including a spreadsheet upload tool, which allows clients to enter an Excel file into Instinct with names they want to buy or sell, along with the price they would like to trade at. If the price is matched or bettered, the trade will be executed, which offers an alternative to a traditional OWIC or BWIC, said Naboicheck.

The bank also now offers commission-free trading for clients that put in US$25m of bids or offers in a session, he said.

“Everything done for Instinct has been to increase liquidity, and allowing and encouraging clients to put more bid and offers [in the system] helps accomplish that,” Naboicheck said.

MarketAxess’ electronic loan trading platform was launched in the second half of 2016, and allows investors to request loan prices from a variety of firms.

There are now 13 dealers using the loan system including Credit Suisse and Deutsche Bank, and about 40 active clients, according to Sandy White, the high yield and leveraged loan product manager at MarketAxess.

Reporting by Kristen Haunss; Editing by Tessa Walsh and Michelle Sierra

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