By the Numbers

Parsing the CLO TRACE volume data

Caroline Chen | November 3, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Although the CLO market sees more absolute trading volume in investment grade debt, it sees more trading in non-investment grade debt as a share of the outstanding market. That’s the picture painted by TRACE. And it likely reflects the presence of more buy-and-hold banks and insurers in ‘AAA’ and other investment grade classes and more total return managers in non-investment grade. TRACE also shows where the net buying and net selling is taking place. The answer may surprise you.

TRACE shines some light on secondary

The US CLO market has grown in depth and investor base over the years, with the outstanding market NOW around $1 trillion. Despite the growth, secondary trading can seem opaque. Many CLOs on the bid-wanted-in-competition lists (BWICs), for example, often end up with an unspecified trading status. However, brokers and dealers, as members of the Financial Industry Regulatory Authority (FINRA), are required to submit daily trading data to FINRA’s Trace Reporting and Compliance Engine (TRACE). Looking through the TRACE-reported volume data sheds light on the perception of market liquidity.

Non-IG CLO trading volume relative to its market size has been higher than IG

Rather than looking at the absolute trading volume in dollars, volume as a proportion of outstanding market size provides a good indication of liquidity. TRACE data suggests the trading volume of non-investment grade (non-IG) CLOs relative to their outstanding market size has been consistently higher than their investment grade (IG) counterparts in past years, with a 5-year median of 32% compared to 13% for IG CLOs (Exhibit 1).

It is worth noting that the trading volume of non-IG CLOs relative to the outstanding market has declined in both 2022 and so far in 2023, whereas volume in IG CLOs relative to the market size has increased.

Exhibit 1: Trading in non-IG CLOs relative to their market size has slowed YTD

Note: TRACE data represents an aggregate volume in each calendar year. 2023 data as of Oct 31, 2023. The outstanding market sizes in IG and non-IG are market size at the end of each calendar year except for 2023 which represents the current outstanding market size as of Oct 2023. Non-IG CLOs include ‘BB’ or lower-rated tranches as well as CLO equity. Data represents both broadly syndicated loan (BSL) CLOs and Middle market loan CLOs.
Data source: FINRA, INTEX, Bloomberg, Santander US Capital Markets.

Customer net trading positions in IG and non-IG CLOs show different trends

TRACE data also breaks out CLO’s daily trading volume by customer buy, customer sell, and dealer-to-dealer trades. As such, customer net positions can be calculated by subtracting the volume of customer sell from the volume of customer buy. A positive customer net position in IG CLOs in a month, for example, indicates investors are net buying IG CLOs in that month. FINRA’s reporting rule excludes brokers and dealers from the definition of customer.

While TRACE reported heavy customer sell volume in a few months in the past five years, investors, in general, added IG CLOs on a net basis. The trend continues this year, with last October’s $765 million being the highest customer monthly trading volume in the IG market on a net basis (Exhibit 2).

Exhibit 2: Customer buy volume exceeded sell volume in IG CLOs in most periods

In contrast, investors were net sellers in the non-IG CLO market in past years, except for 2018. However, the gap in buy and sell volume has narrowed this year, with investors only selling $456 million in non-IG CLOs on a net basis (Exhibit 3). It is worth noting that TRACE reported a few months with extremely high trading volume in past years, which was driven by one specific trading day in that month.

Exhibit 3: Customers have been net sellers in non-IG CLOs

Note: $ in millions. Oct 2023 data as of Oct 27, 2023. Customer net position = an aggregate monthly trading volume of customer buy – an aggregate monthly trading volume of customer sell.
*TRACE reported $935 million of customer sell volume in non-IG on Sept 13, 2019, $5.9 billion of customer sell volume in non-IG on Sept 22, 2021, and $981 million of customer sell volume in non-IG on Sept 16, 2022.
Data source: FINRA, Bloomberg, Santander US Capital Markets.

Both daily trading volume and volatility in non-IG CLO have declined this year

The average IG CLO daily trading volume in 2022 and this year has been around $635 million, almost double the level in 2021. The volatility as measured by the standard deviation of daily trading volume has increased along with the rise of trading volume in IG CLOs. Trading volatility in IG CLOs was highest in 2020, when the pandemic caused a wave of fund redemption and spread widening. Non-IG CLOs, on the other hand, saw their average daily trading volume and volatility peak in 2021, when the primary market had a record-high new issuance. The average daily trading volume in non-IG CLOs year-to-date has been around $162 million, the lowest since 2020. Trading volatility in non-IG CLOs has also dropped to the lowest level in recent years (Exhibit 4).

Exhibit 4: Compare the IG and non-IG CLO daily trading volume and volatility

Note: Data represents daily trading volume in IG and non-IG CLOs reported by TRACE. 2023 YTD data as of Oct 31, 2023. Days with no TRACE data or zero trading volume in TRACE are excluded from the analysis.
Source: FINRA, Bloomberg, Santander US Capital Markets LLC

In summary, TRACE volume data in CLO IG and non-IG markets reveals some interesting observations in the secondary market. Contrary to most perceptions of non-IG market illiquidity, non-IG CLO trading volume was high relative to its market size in past years. However, non-IG CLO trading activity has slowed this year while trading volume in investment grade has stayed high. Investors have been net buyers of the CLO IG market, and that trend seems to continue.

Caroline Chen
caroline.chen@santander.us
1 (646) 776-7809

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