FinTech Magazine hears the thoughts of Octaura CEO Brian Bejile, Chief Product Officer Vitaliy Kozak, and Head of Loan Execution Howard Cohen, on why now is the best time to tap into the syndicated loans market.
The launch of Octaura in 2022 arrived at a time of unprecedented growth in structured credit; 91% of institutions in the US and Europe express a desire to increase their allocation. A growing interest in structured credit investment vehicles can be attributed to greater innovation in the sector, an improving regulatory environment, and greater transparency.
Octaura represents a significant milestone in the advancement of this market. As such, we’ve had a chance to sit down with Octaura’s leadership to discuss historical market limitations, how the team has been able to unite long-time competitors, and what Octaura means for the asset class going forward.
This is an exciting time for the Syndicated Loan market, and Octaura has played a major role in delivering a new way of trading loans. What is the vision for Octaura? How did you go about bringing the other banks on board?
Brian Bejile, CEO: As a trader of both Syndicated Loans and CLOs, I had a unique insight into the intricacies of both markets. I got to watch these markets experience rapid growth, which eventually outran infrastructure and workflows that had been put in place earlier in the markets’ lifecycles. It was clear to me that we had to upgrade our market infrastructure if we want to continue to be bullish and expect structured credit to continue to outperform.
Vitaliy Kozak, Chief Product Officer: Buy-side customers in the CLO space use auctions to collect bids and trade. However, this process is outdated and inefficient for both the buy-side and sell-side. For the buy-side auction, it takes on average 90 minutes to complete, and the chances of buying CLOs after that can be as low as 10%. For the sell-side facilitating auctions, it can take as much as 60% of the trader's time to generate less than 5% of overall revenue– these are significant imbalances that need to be addressed. And while the auction process is an important part of the market, Octaura aims to make the overall process substantially more efficient, reducing time spent on auctions down to 15 minutes with the help of technology that adds transparency to the process. Now, this is why when we are talking about Octaura you always hear execution and data analytics. The primary goal of data analytics is to help clients to establish the market at any point in time. By doing that, you know they have this transparency and confidence, and that will drive additional electronic trading in general.
Howard Cohen, Head of Loan Execution: Exactly. We’re going to be freeing up people's time and we're going to allow them to focus on more trades and more profitable trades for them and their investors. Octaura empowers loan investors with pre-trade information in much the same way traders in other asset classes enjoy. There have been significant technological advances to other fixed-income asset classes while the loan market had been orphaned. Something actually happens when you introduce electronification. It means that you have created the capacity to conduct four times more of the business that you are doing today. With significant growth in the number of trades you have more business happening – and obvious potential for more revenue. Here at Octaura, we're developing electronification solutions based on what clients are asking us for, and the feedback we've received from them is overwhelming receptivity.
What kind of impact do you expect Octaura’s platform to have on the overall liquidity of the market?
HC: We're in a unique part of the credit cycle right now. Spreads are wider than where they have been. We're likely heading into a time where there are going to be higher default rates from where most of the market overwhelmingly is covenant-lite. So, we need a more expeditious way for clients to get in and out of risk to decide which credits they like and which credits they don't like. Those clients need information about where loans have been trading to be able to make relative value calls within a particular sector or within a rating bucket. Electronification is going to facilitate much lower frictions around trading– not only just to transfer risk, but also around the loan trading workflow, sourcing bids, and offers transacting with particular dealers connecting with your back office.
VK: And I would just add to that, it is important to not lose sight of the bigger picture. For example, large US corporations are in the loan market to borrow money from the banks to finance their growth or expansion. If you can increase efficiency and trading volume in the secondary market, that could lead to a reduction in the cost of borrowing. These companies then have the option to pass down their savings to consumers, making it cheaper for everybody to use goods and services.
This platform is truly innovative in that it combines execution services, data, and market analytics all in one place. Investors in Structured Credit have never had this type of transparency from dealers before. How will this change the way dealers do business going forward?
BB: This is going to make trading so much easier for everyone, including dealers. I like to think of Octaura as doing for the Syndicated Loan market what Seamless did for restaurants, or Expedia did for travel. Salespeople have been subjected to wasting so much of their time dealing with the Bid Wanted In Competition (BWIC) process, and this will free up their time to focus on other things. Any time you empower clients to make educated decisions, you’re adding value as a dealer.
HC: Exactly! We’re a platform company. We're bringing people together and that speeds up trading execution. There are so many factors that result in a trade, and our goal is to help streamline that process. Credit analysis, understanding liquidity, price transparency, understanding of Credit Agreements – right now all of these elements are done in different places and are not available to all investors. We are looking to collate and centralise that information.
So tell us, how does it work?
VK: The way we are bringing innovation is in gradual steps. Octaura is not trying to come up with completely new protocols. Our success hinges on the fact that we know what existing trading protocols are – they all have their purpose. Electronification serves to make this process more efficient. That's one of the reasons there’s no need to have a formal tutorial on the platform. When traders log in they already know how it works. All the buttons are labeled as they would have experienced it in “real-world” trading. Our success in replicating this framework is largely due to the substantial amount of feedback we received from each of the seven leading dealers in the market when we were in the design phase. The second part of this is API and FIX connectivity. When trading on a platform all trades go directly into the systems automatically, sell side or buy side.
Can you say, then, that Octaura helps with risk mitigation?
VK: Yes. Octaura works with the industry’s leading order management system (OMS) providers to enable pre and post-trade integrations. By introducing electronic trade to the marketplace, Octaura can properly support the supervision and monitoring of trade activities, alleviating some inherent risks from traders. When done by hand the error rates are high, and the cost of those errors is even higher, even if it's not intentional. With Octaura, traders can demonstrate they have proper monitoring in place and that they follow regulators’ procedures. They can take a report and show it to the regulators. When I was on the trading desk I really paid attention to these things because the cost of the mistakes can be really high. There’s always risk when trading, but Octaura helps to monitor and measure it, especially for the banks, but also for the buy side.
HC: Vitaliy, you remind me of when I used to have to go back and print off old runs and prove that I was transacting at the best price. Proving the best execution can be a time-consuming process with strict methodologies. Electronic trading allows for a frictionless way to collect all of the data around all of your trades. With a streamlined process that electronification offers, a trader can see how many bids or offers they received. A trader will know who those bids and offers came from, who is providing good liquidity, and who is stepping up when you go to transact. So all of those archaic, manual processes that used to entail having to go to a separate terminal are now done in one place.
What are your clients saying about how this compares to how trades were previously done?
HC: All of Octaura is built for the clients and the dealer community, and it's intuitive in the sense that we built it the way they've asked. There seems to be a consensus that our platform is successfully addressing a multitude of friction points in trading loans.
BB: That’s right. And, specifically, the ability to access data and research, execute and book a trade on a single platform has the industry really excited. Nobody wants to go back to that giant game of telephone we used to play, not to mention the countless hours it would take to conduct manual bookings.
VK: We are running dozens and dozens of demos each day. The most visceral reactions we’re getting relate to how we’ve automated a process that used to take a few hours to do up to a full day. The current auction process takes an extended amount of time because you can imagine as a trader, you're sending out an email, you're sending it on a terminal while you're fielding phone calls. It takes two or three people on your desk, and it's a pain. Then no one is happy when the trade gets done. Everyone wanted a last look, someone thought they put in a different price than what you actually transacted. It has been a really problematic process. There is a demand from clients for a better process. Before you transact in the list, there is an efficient way to connect with your order management system. Build that list and then also connect with a dealer community where you field bids and offers.
CLO trading on the Octaura platform will come next. What can clients expect in the CLO tranche market?
BB: You're right, CLO is the next asset class that we're addressing following the launch of our platform for loan trading. The plan is to have the first CLO trading protocols later this year. One common theme that you're going to hear us talk about is that we want to respect each market’s nuances, meaning that you can’t just copy and paste what you have done in the loan market and expect to work in the tranche market. As an example, we brought in inventory list protocol functionality for the loan market. When we go to the tranche market, you're going to see us prioritise the BWIC protocol because that is one of the biggest challenges for trading CLOs.
HC: I’d say the CLO market has been largely illiquid. You have to look at so many things like portfolio composition and you need to read the docs. So it can be a difficult market. It doesn't trade a lot. It's difficult to analyse, but actually, it's a US$1tn market. So it's big. Our objective here is two-fold: 1) increase the velocity of secondary trading and 2) address data and analytics to cut down the time it takes to analyze each CLO substantially.
Bonus Question! Octaura is an interesting name. Why did you decide on that name for this exciting new platform?
BB: The ‘oct-’ prefix represents 8, or ∞, the symbol for infinity and an endless loop of evolution and movement for the markets. This symbol also represents our vision for a sense of connection and unity for the industry. Oct- is also a nod to the original ‘Octopus’ of investors - seven leading global banks plus our integrated data and analytics provider. With all these components, our vision is to introduce the latest tools and technologies so when clients come to trade they can use our services almost seamlessly without even knowing that a lot of work is being done in the background. Having that sentiment captured in our name makes it really easy to connect with our purpose every day.
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