May 17, 2023 - A panel of loan traders, portfolio managers and technology providers gathered to discuss loan market liquidity, several new and innovative ways to enhance liquidity, and the potential for a broad-based adoption of electronic trading in the secondary loan market.  While liquidity levels on individual loans are most often correlated to facility size, recent technological advancements are allowing for a much more efficient way to collate dealer runs, analyze trading opportunities and to execute those trades across a wider band of dealer desks – all of which is already having a positive impact on liquidity.  Furthermore, as the market begins to shift more of its pre-trade data and analysis mechanisms to electronic platforms, two relatively new ways to strategically trade large baskets of loans should flourish.   These techniques are commonly referred to as “portfolio trading” and “optimization trades”.  While portfolio trading is a style of execution, where the transaction is executed as a package instead of a series of one-off trades, optimization trades are more strategic in nature, and use a quantitative approach to constructing and executing portfolio management decisions.  In addition, as electronic trading begins to take off this year (two new vendor platforms have already began executing trades electronically in 2023), panelists believed that traders will instantly benefit from a much more efficient and effective pre-trade process which will lead to better execution (via tighter bid-ask spreads).  But like any transformative change, it will take time for the loan market to embrace electronic trading.  That said, as more buy- and sell-side traders begin to incorporate electronic trading into their broader trading strategies, trade frequency (market depth) will improve in the short term, as the all-in cost (both time and money) to execute a loan trade falls alongside higher trading volumes.  Longer term, the market will also benefit from an improvement in the number of loans that are made available to trade (market breadth) across a larger number of market makers, which will also drive trading volumes higher.  These are in fact exciting times in the loan market.

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