Octaura preps for CLO trading launch

On May 24, 1883, the Brooklyn Bridge opened in New York City. While a feat for its time, the suspension bridge was the first to connect the boroughs of Manhattan and Brooklyn over the East River, and that concerned New Yorkers. Many were worried that the bridge would be unable to handle the weight of traffic and collapse.

Only a few days after the bridge’s opening, public trust and morale plummeted when a stampede was accidentally triggered by a woman falling down the stairs to the bridge. Not exactly a banner-worthy start.

Before the bridge opened, famed showman PT Barnum had volunteered his circus elephants to cross the bridge at its opening, but his request was turned down. The city needed him now. In 1884, a procession of 21 elephants and 17 camels, led by Jumbo the elephant (the reported inspiration for Disney’s Dumbo), crossed the bridge without incident, showcasing the bridge’s strength and utility. Today, according to statistics from the New York City Department of Transportation, 149,000 people and cars cross the bridge daily.

Two years ago, a big question that people had—rightfully so—was, ‘Is this going to work?’

Brian Bejile, Octaura

It’s the tale of Barnum’s elephants and the bridge that Octaura CEO Brian Bejile tells when reflecting on the growth trajectory of the loan trading platform, likening it to the story of getting any electronic trading platform off the ground.

Breaking through

Octaura’s beginnings can be traced back to the spring of 2021, when it was first reported by WatersTechnology that a consortium of banks led by Citi and Bank of America was preparing to combine its members’ collateralized loan obligation (CLO) trading efforts into a new multi-bank trading platform under the working title Project Octopus. By the following year, the efforts of that consortium were formally announced as a new company called Octaura with Bejile as CEO.

“Two years ago, a big question that people had—rightfully so—was, ‘Is this going to work?’” Bejile tells WatersTechnology today.

Consortium efforts in the capital markets have had mixed results. There are the obvious successes in fixed-income trading platforms Tradeweb and MarketAxess, which were founded in 1997 and 2000, respectively, with support from major bond-trading banks. However, the banks ceded their investments. Thomson Corp. bought Tradeweb in 2004, then sold stakes to 10 major dealers in 2008. Tradeweb went public in 2019. MarketAxess went public in 2004.

There are also the apparent failures. A consortium led by the top three fixed-income venues by trade volume—Bloomberg, MarketAxess, and Tradeweb—came together in 2022 under the name Cassette to win the contract for the bond market’s consolidated tape, but that fell apart late last year. There was also the Cohesion project undertaken by a group of European and UK banks to build their own fixed-income trading software, in a move that would have allowed members to cut ties with the market’s biggest vendor, Ion Group. That also appears to have gone bust.

But Octaura has emerged, thus far, as a success story. Last April, the trading platform went live with loan trading. “When we launched, we had about three dealers, maybe 30 to 34 buy-side accounts,” Bejile says. “We are now at 16 dealers on the platform and about 109 buy-side accounts last time I checked. So, massive adoption on both the buy side and sell side.”

We’re creeping up on the telephone. That’s the competition at this point; it’s the status quo

Brian Bejile, Octaura

Those 16 dealers represent about 85% of the sell side’s market share, while the platform currently has 75% of the 100 largest buy-side accounts in the loan market, according to Bejile. Eight additional dealers are currently in the process of onboarding, which Bejile says will move the market share percentage closer to the high 90s. Alongside Citi and Bank of America, Credit Suisse, Goldman Sachs, JPMorgan, Morgan Stanley, and Wells Fargo were also consortium members.

“I think we have demonstrated that there is sufficient demand for what we’re putting out there,” Bejile says.

New frontier

Later this year, Octaura will launch CLOs as its second asset class. The platform is currently in beta with CLO trading with several sell-side and buy-side participants. Bejile told WatersTechnology in 2022 that the plan was to roll out loan trading first before moving to CLOs to not overwhelm the market and allow buy- and sell-side firms to adjust workflows.

CLOs are also a more complex asset class than loans. They are classified as securities and, therefore, regulated by the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (Finra). They typically contain loans that are ranked under investment grade and can be a grouping of at least 100 loans. A CLO manager will usually sell stakes of the CLO to investors in tranches. Because CLOs are securities, to operate as a trading venue, Octaura needs to obtain a broker-dealer license and a license to operate as an alternative trading system (ATS).

Octaura currently holds 1% of loan market share, Bejile says, meaning 1% of all loans trade on the platform. “There’s 99% to go, but context is everything,” he says. That additional context is that Octaura’s main competition in this space is the phone.

A June 2021 report from Coalition Greenwich found that market participants saw the syndicated loan market as the second biggest market ripe for the 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.”

“We’re creeping up on the telephone,” Bejile says. “That’s the competition at this point—it’s the status quo.”

Additionally, the leveraged loan market sits right next to the high-yield bond market with the same issuing companies like Burger King and American Airlines. The bond market started its electronic trading journey 10 to 15 years prior to the efforts of Project Octopus, and Bejile is optimistic about the adoption growth the platform can achieve among market participants, saying the platform is expected to hit 2% market share in the next six to eight months.

Kevin McPartland, head of market structure and technology research at Coalition Greenwich, says it can be a very long and slow road for electronic trading in over-the-counter (OTC) markets. “Tradeweb and MarketAxess were effectively launched 25 years ago at this point, and really only in the last few years has it felt like, okay, these are major players and they’re handling a huge amount of the market, and the market can’t function without them,” he says.

Google has done a great job of hiding the technology to make it simple, right? All great technology does that, it masks the complexity

Brian Bejile, Octaura

Old habits also die very hard on a trading desk, he adds. “People just get very comfortable in how they do their jobs, and encouraging them to do something different is hard,” McPartland says. Onboarding and integration time can also factor in when financial institutions must take stock of what systems they are on, who the counterparties are, and so on.

Bejile acknowledges these challenges and it’s in this context that he refers to PT Barnum’s elephants and the Brooklyn Bridge. “Changing things, you’re going to have people who are visionaries—they get it right away,” he says. “There’s a good chunk of that in this market. But you’re going to have a small group of people who have, frankly, just a challenge with new technology, new things.”

Building out

In understanding that its main competitor is the phone, Octaura has continued to build out the platform with new trading protocols and analytic tools. “The chief product officer jokes that we have three years of work ahead of us. So, we have a backlog of things we need to do,” Bejile says.

The platform currently has three trading protocols available: bilateral engagements, request for quote (RFQ), and List, which was made available last fall. Using pre-trade analytics, the List protocol can inform investors of dealer liquidity and historical loan performance. Users can send a portfolio of loans to multiple market-makers for pricing and receive responses in near-real time.

One month after List was made available, 90% of volume was coming from bilateral and RFQ with about 10% from List. “Today, it’s probably 70% List and 30% the other two protocols,” Bejile says. “So, what’s happened there? Well, we listened to what people wanted. They wanted to trade more loans at the same time. And that’s what List allows you to do.”

Octaura is also building relationships with order management system (OMS) providers. Allvue Systems, State Street’s Charles River Development, LevPro, and SS&C Eze are all current partners. Last week, Octaura launched a two-way interface with Charles River, allowing joint CRD and Octaura customers connectivity between the two platforms, enabling, they say, automatic trade booking and reduced risk of errors. 

Bejile says prior to the interface, Charles River users leveraged Octaura to execute trades, but would have to switch between platforms to stage and view orders, and then book the trades. The new connectivity reduces the risk around manual entry.

In building a trading platform and being a computer engineer by background, Bejile is also conscious of the current technology landscape. 

The last year has seen incredible attention paid to artificial intelligence and generative AI. Trading platforms across asset classes have rolled out new features boasting AI-enhanced capabilities, while both the buy side and sell side consider where the tech fits into their tech stacks and digital strategies.

“My view about all of this stuff—particularly data or tech in general—is that the best technology is one where we don’t talk about the technology; we talk about the impact of the technology,” Bejile says. He points to Google as an example.

“So when you open up Google, you see one big text box, but that’s it. And that’s one of the most valuable companies, but they only have this one box. How can that be, right?” he says. “That’s because they have done a great job of hiding the technology to make it simple, right? All great technology does that—it masks the complexity.”