Author Topic: More gaming of the system ver 2.0?  (Read 15763 times)

Rob L

  • Hero Member
  • *****
  • Posts: 2108
    • View Profile
More gaming of the system ver 2.0?
« on: August 17, 2013, 02:38:23 PM »
The following loan was fully funded in the first 10 seconds after new loans were released today at 10am PDT (somewhere between 10:01:30 and 10:01:40):
https://www.lendingclub.com/browse/loanDetail.action?loan_id=6816247
If you believe 4 different individual investors chose this same loan and executed a buy within the first 10 seconds I have some swamp land in Florida I'd like to sell you. It was, almost certainly, a single API transaction / purchase of the same loan, using four different accounts. This is a $5,500 loan, so each note was probably $1,375.

Does this break the 70% rule? Could be a LLP with a dozen or more wealthy members. Would these be considered legitimate separate and individual buyers, or a simple way to skirt the 70% rule? What if it's one individual with multiple accounts? If this trade doesn't break the 70% rule then what does?

core

  • Hero Member
  • *****
  • Posts: 1784
  • Your loss is my gain
    • View Profile
Re: More gaming of the system ver 2.0?
« Reply #1 on: August 17, 2013, 02:45:45 PM »
This is looking more like Salem 2013 by the hour.  Let's press him with stones!

Keep the defendants coming.  This makes for some good reading.

GS

  • Sr. Member
  • ****
  • Posts: 413
    • View Profile
Re: More gaming of the system ver 2.0?
« Reply #2 on: August 17, 2013, 03:13:21 PM »
I don't think it's a witch hunt to ask these sort of questions.  I've also thought that the 70% rule can be easily overcome with two accounts, and it would be nearly impossible for LC to detect unless both accounts were hosted on the same IP, and the operator made no effort at all to mask the IP. 

The point is, LC took some actions to help the "little guy", but the 70% limit doesn't work -- it doesn't even slow things down.  The "Whole Loan Program" didn't help -- in fact, it's done quite the opposite by limiting loan access to the small investors.

If LC is serious about keeping the small investors in the game, then they need to find a serious solution.

core

  • Hero Member
  • *****
  • Posts: 1784
  • Your loss is my gain
    • View Profile
Re: More gaming of the system ver 2.0?
« Reply #3 on: August 17, 2013, 03:29:58 PM »
Imagine if Rev came up with a super-duper invite-only version of Interest Radar, and had only 4 users at the time.  A note came in and this note met the filter requirement of all 4 users and the note was purchased from the same IP for the 4 of them.  Would that be an abuse?  Heck if I know, but it's damn near impossible to police these things.

A bulletproof way to get around such limitations would be to have 4 friends in different cities, 4 proxy IPs, and then you just give each friend a small cut for being able to use his identity.  There's no way the 70% limit will prevent people from buying a large percentage of notes.  It just adds a miniscule amount of time and trouble. 

Why even talk about the 70% rule when they are freely handing out 100% pieces to whoever wants them???

Rob L

  • Hero Member
  • *****
  • Posts: 2108
    • View Profile
Re: More gaming of the system ver 2.0?
« Reply #4 on: August 17, 2013, 04:27:59 PM »
It didn't take long to get to what seems to be complete agreement on this one. Not only did the loan I cited originate from a single IP, I have little doubt it was a single API buy order. Was the 70% rule broken? Ambiguous. Core's super-duper-IR example could easily result in a single API transaction, and FWIW I personally don't think that's rule breaking. Bottom line, the rule is unenforceable, even if there was a desire to do so (which is at best unknown). The cat is out of the bag on this one too (but this game is an obvious one). Its affect on individual retail buyers is considerable.

So the theory was to have the whole loans program for large investors and a 70% rule to protect the retail investors. The unintended consequences resulted in retail investors being denied all access to loans set aside for the whole loan program, and a 70% rule that isn't working and probably can't work.

New Jersey Guy

  • Hero Member
  • *****
  • Posts: 914
  • Hell Yea it's a Hemi!
    • View Profile
    • Email
Re: More gaming of the system ver 2.0?
« Reply #5 on: August 17, 2013, 04:51:46 PM »
"The unintended consequences resulted in retail investors being denied all access to loans set aside for the whole loan program, and a 70% rule that isn't working and probably can't work."

Okay.....so now what?
Return over deposits:   66.82%
IRR:   86.54%
As of April 30, 2014

GS

  • Sr. Member
  • ****
  • Posts: 413
    • View Profile
Re: More gaming of the system ver 2.0?
« Reply #6 on: August 17, 2013, 06:03:30 PM »
Several possible solutions have been discussed before.  My favorite would be limiting the maximum investment to $100 or less for a subset of loans, for a limited time ... something like, for the first 24 hours, for a randomly selected 25% of new issues. After 24 hours, whats left gets put up for grabs.  That would be tough to creatively overcome.  I supposed the institutional investors could create several accounts and fund $100 each, but I doubt it.

nonattender

  • Hero Member
  • *****
  • Posts: 719
  • I am not here.
    • View Profile
Re: More gaming of the system ver 2.0?
« Reply #7 on: August 17, 2013, 07:35:34 PM »
I didn't read most of this, and the other thread on the same/similar topic, but the only "answer" to this is less an option than an eventuality:

Prosper had the proper at-scale model when it launched public in 2006 with RATE AUCTIONS built into the primary market.  They
simply built the model that would work at scale before scale was reached, so, they got leapfrogged.  Auctions will be back soon.

-t
A little nonsense now and then is relished by the wisest men.

core

  • Hero Member
  • *****
  • Posts: 1784
  • Your loss is my gain
    • View Profile
Re: More gaming of the system ver 2.0?
« Reply #8 on: August 17, 2013, 07:49:28 PM »
Auctions will be back soon.

No, I don't think they will be.  I posted this in another thread, but basically what happens is people bid the rates very low and then turn around and complain about how they lost money.  The supply of eager investors who don't know any better (or don't care) is too large for the investor population to self-correct quickly.  People subsequently get to know P2pCompany X as a bad place to invest, meaning bad returns, and it folds.

If Company X didn't have to worry about their image in investors' eyes, then it could probably work.  Maybe LC is already big enough to be at that point?  It would be interesting to see what would happen.  I know I sure wouldn't stick around when 5% rates were on the high side.

rawraw

  • Hero Member
  • *****
  • Posts: 2790
    • View Profile
Re: More gaming of the system ver 2.0?
« Reply #9 on: August 17, 2013, 10:12:36 PM »
Bidding on unsecured loans is just a recipe for disaster.  I'm pretty such the industry figured that out the hard way.

rlv99

  • Full Member
  • ***
  • Posts: 194
    • View Profile
    • Email
Re: More gaming of the system ver 2.0?
« Reply #10 on: August 17, 2013, 10:31:21 PM »
IMO, there is something else at work here!  This is NOT your pristine note. Income too low; DTI too high. I would expect to see this note paid-in-full when the first payment is due.

nonattender

  • Hero Member
  • *****
  • Posts: 719
  • I am not here.
    • View Profile
Re: More gaming of the system ver 2.0?
« Reply #11 on: August 17, 2013, 10:34:06 PM »
Auctions will be back soon.

basically what happens is people bid the rates very low and then turn around and complain about how they lost money.

Right, so, a small auction window, with floors perhaps, and institutional investors who can price risk relatively well (as opposed to... the
past) and no problem running real-time auctions for investors to fill borrower requests without delay, based only upon standing orders.

Maybe LC is already big enough to be at that point?  It would be interesting to see what would happen.  I know I sure wouldn't stick around when 5% rates were on the high side.

An auction mechanism as a relief valve for, essentially, oversubscription to particular issues could work in a variety of ways, some that
Prosper tried and some that it did not.  All would force effective investor yield down due to competition, but borrowers may not be the
beneficiaries of an auction process.  Imagine that there's a 1-3% spread window where investors essentially buy subscription priority,
through signalling their willingness to pay >1% "servicing fee" to a particular platform for the right to jump the line ahead of next guy.

Lots of potential manifestations...  Not there yet, but...  It's coming.  LC already incents big investors, that circuit will reverse, at scale.

More games ahead.
A little nonsense now and then is relished by the wisest men.

berniemadeoff

  • Guest
Re: More gaming of the system ver 2.0?
« Reply #12 on: August 18, 2013, 12:15:01 AM »
My idea is to get rid of API altogether.  LC and Prosper should come up with their own Auto-Invest tools that let everybody compete on a level playing field. At "feeding times" some algorithm allocates the loan to every investor who wants it and if oversubscribed will allocate on a pro rata basis with even the smallest investor getting at least a $25 piece.  The system may need to delay completing the investment by 10-15 min after loans are released so that it can determine how much everybody receives.

Either that, let the retail investors get first crack, letting them buy as much as they want for the first few hours.  Investors can get whatever they want after that.  The government does something like this for bonds and munis. 

I don't think any of these approaches would reduce loan demand in any way, which is all LC and Prosper care about anyways.

mo

  • Full Member
  • ***
  • Posts: 158
    • View Profile
Re: More gaming of the system ver 2.0?
« Reply #13 on: August 18, 2013, 12:19:24 AM »
It didn't take long to get to what seems to be complete agreement on this one. Not only did the loan I cited originate from a single IP, I have little doubt it was a single API buy order.

What are you guys talking about there is no way you can know where an order originated from.  The likely explanation of this is multiple people running automated API investing systems there is nothing strange about a loan selling out in 10 seconds in this environment.  You might not be happy about it but there isn't any funny business going on there.

Fred

  • Hero Member
  • *****
  • Posts: 1421
    • View Profile
Re: More gaming of the system ver 2.0?
« Reply #14 on: August 18, 2013, 02:27:38 AM »
What are you guys talking about there is no way you can know where an order originated from. 

I was wondering about the same thing.  Perhaps Rob has friends at the LC IT department?