MarketAxess is planning to expand Open Trading, its electronic corporate bond trading platform, to include leveraged/syndicated loans in early 2022. Open Trading is currently used by more than 1,000 buy- and sell-side firms acting as liquidity providers, and utilizes an all-to-all trading protocol, which enables the buy side to trade among one another or with the sell side in an anonymous pool and with no limits on the number of dealers trading firms can interact with simultaneously. The release will mark the first instance of all-to-all trading applied in the loan market.

As the vendor builds out Open Trading’s loan capabilities, it is drawing upon its success in the bond market—MarketAxess recorded a monthly trading volume of $499.6 billion in July 2021—to replicate similar features for users.

“What we have here at MarketAxess is dovetailing off of the enhancements that we provide to clients on the bond side and bringing that to the loan side,” says Howard Cohen, head of leveraged loans. “We are trying to use the existing blueprint that [we] have set up on the bond side, and use that to facilitate change, improve liquidity, [and add] transparency in the loan space.”

Cohen sees the loan market—which is less uniform and even more bespoke in nature than bonds—as orphaned from the electronification happening within the wider bond market, which has prevented its level of technology adoption from maturing alongside other fixed-income products. Fixed-income trading overall, however, still relies largely upon a combination of phone calls, chat messages, and interpersonal relationships, despite the introduction of new electronic protocols for bond-trading, such as request-for-quote (RFQ), used by Tradeweb and Bloomberg, for example; central limit order book, used by CME BrokerTec; and all-to-all, used by MarketAxess.

Cohen says MarketAxess won’t sit in between the buyer and seller, and will instead hire settlement banks to settle the post-trade workflow that is unique to loans. Settlement time in loan markets is estimated to be up to 19 days, according to the Loan Syndications and Trading Association (LSTA).  

“These are the sort of the idiosyncrasies that need to be ironed out. And that’s why it’s not just a plug-and-play and taking what the team is doing on the bond side and Ctrl+C, Ctrl+V,” he says.

MarketAxess’s leveraged loans multi-dealer trading platform and Bank of America’s single-dealer platform, Instinct Loans, are currently the only two loan trading platforms on the market, though neither utilizes an all-to-all mechanism. Instinct Loans allows clients only to trade with BofA, while MarketAxess’s leveraged loans platform relies on the RFQ protocol in a many-to-many environment. Kevin McPartland, head of research for market structure and technology at Coalition Greenwich, estimates that together they account for 1-2% of secondary market activity.

A June 2021 report from Coalition Greenwich found that e-trading in the syndicated loan market is growing after 18 months of an “e-trading tailwind” in the fixed-income market, in large part spurred by office and trading floor closures caused by Covid-19. McPartland says that emerging technology projects specific to loans—such as the multi-dealer Project Octopus for collateralized loan obligations—are steps in the right direction for the nascent market.

From manual and opaque to ‘exchange-like’

Greenwich’s research indicates that market participants see the syndicated loan market as the second biggest market ripe for opportunity to reap efficiency gains from technology used in corporate bonds. It was ranked last for its current adoption of technology, with 23% of participants rating it “largely manual.”

A step for improving any market often centers on the level of transparency available. Unlike in the bond market, loan trading isn’t subject to mandated reporting via Trace—the Trade Reporting and Compliance Engine overseen by the Financial Industry Regulatory Authority (Finra) for over-the-counter instruments—which means there’s little to no view into where loans are currently trading and where they have traded in the past.

“Where more data allows for more electronic trading and the more electronic trading there is, the more data there is, on and on we go by mass,” McPartland says. “That’s exactly what happened in corporate bonds.”

An all-to-all approach offers loan constituents anonymity, which Cohen says is an important feature to customers who trade illiquid instruments, as firms will look to cobble together a big trade without alerting the rest of the trading world, or will try to wind down large positions without raising attention that could impact price.

“Open Trading simulates an exchange-like environment for bond trading while remaining an over-the-counter market,” says Richard Schiffman, head of Open Trading at MarketAxess. “To be able to accomplish that without having to establish all of these relationships is a really valuable thing. It takes time and effort and resources [in] understanding who the counterparty is and the credit risk of the counterparty, and all of the know-your-customer work that must be done. There’s an overhead to maintaining all those relationships.”

All-to-all trading’s roots at MarketAxess began in 2001 when the company acquired TradingEdge, which did all-to-all exclusively. In the early 2000s, bond market liquidity seemed less of an issue than it would become during the financial crisis of 2008, at which time MarketAxess added more than 80 smaller dealers to its existing 20 major dealers.

In 2011, MarketAxess created the Market List page, which allows a buy-side firm to share inquiries with other market participants so they can anonymously view who is looking to buy or sell at a given time. The Market List page has been extended to the loan space as the early stages of Open Trading for loans. In 2013 MarketAxess began acting as an intermediary in open bond trades, ushering in the advent of Open Trading and partnership between with BlackRock to promote all-to-all trading in the corporate bond market.