Author Topic: Fairer Solutions to Excess Investor Demand  (Read 57589 times)

brycemason

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Fairer Solutions to Excess Investor Demand
« on: August 18, 2013, 11:20:08 AM »
The purpose of this thread is to accumulate and to discuss the merits of potential solutions to the problem defined below. Solution proposals shall be in bold for easy reading, and no other use of bold shall be made. Discussion not on topic will be deleted. I want LC to have a clean thread for the sum of our ideas.

Only a handful of weeks have passed since I had hypothesized in this thread (1) that institutions were buying free time options and sitting on large chunks of notes to the time when we have two other threads (2) and (3) where the concept is blowing up into retail investor fury.

If LC cares about the retail, individual investor, then they need to address this issue because using the website as it is now is untenable. At a technological disadvantage, individual retail investors are left with the cream of the crap a few moments after loan release.

Solution: Stricter Whole & Fractional Pools by Investor Type
LendingClub could code every account as either institutional (LP, LLC, etc.) or retail individuals. X% and (100-X%) of new applications would randomly go into market spaces designated for each type of account for 24 hours. Account types cannot cross into the other space, but after 24 hours, a loan moves into a general pool available for everyone. $Y max fraction on the retail space.

Funds would be less likely to abuse this system because (a) at least one account associated with the fund would need to be an individual, giving a liability opening in their corporate structures, and (b) the trading fees moving individual purchases to a fund account via the secondary market would eat up much of the alpha they generate (especially after their fees). Downsides to LC seem minimal, as any funding delay is at maximum 24 hours above what it is now (which is instantaneous for the loans in question).

Eager to hear more ideas!

(1) http://www.lendacademy.com/forum/index.php?topic=1348.0
(2) http://www.lendacademy.com/forum/index.php?topic=1453.0
(3) http://www.lendacademy.com/forum/index.php?topic=1455.0
« Last Edit: August 19, 2013, 10:11:47 AM by brycemason »

GS

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #1 on: August 18, 2013, 11:48:10 AM »
I like your idea.

Another idea would be a stricter enforcement of the 70% rule.  For the first 24 hours, 30% of each loan in the "fractional pool" must be filled by orders of $100 or less, from different accounts. 

So, if someone jumps in with a 70% order in the first millisecond, that loan is closes to only $100 orders for the next 24 hours.  LC can keep the whole loan program as is.  This solution would require very little tinkering.

Edit:  To clarify, I mean a hard 70% cap on the sum of investments larger than $100.  To use the example of a $10,000 loan, and two large investors both submit $5000 orders (50% each), only the first $5000 order would be accepted.  The other investor would have the option to reduce his order to $2000 to get in under the 70% cap.  From there, for the remainder of the 24 hours, all orders would have to be $100 or less.

This edit was made to clarify based on Core's comment, below.
« Last Edit: August 18, 2013, 01:33:39 PM by GS »

core

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #2 on: August 18, 2013, 11:57:40 AM »
So, if someone jumps in with a 70% order in the first millisecond, that loan is closes to only $100 orders for the next 24 hours.  LC can keep the whole loan program as is.  This solution would require very little tinkering.

Just 2 investors could lock up 50% pieces using the shopping cart loophole and take the entire thing.  As long as both pieces were locked before the first order was finalized it would work.  As long as the shopping cart locks notes it is pretty easy to game most anything that gets put in place.

Get rid of the shopping cart note lockup.  Allow partial fills when the final order is placed.

Randawl

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #3 on: August 18, 2013, 12:18:05 PM »
Solution: Dollar amount restriction per loan fraction (Investment limit per loan, per SSN).
Investors are limited to loan fractions of X amount of dollars, allowing for hundreds of investors to participate in a particular loan.


This would stem the tide, but only for a short period of time.  If the fraction restriction was set to $100, even on a $35,000 loan it could still be theoretically fully funded by just 350 investors.  This may seem like a good idea now, but it won't be long before thousands and tens of thousands of investors want the same note.  This is a Band-Aid solution and investors will find themselves with the same hyper-competitiveness as this asset class continues to grow.

Solution: Round Robin.
Loans are released and investors have 24 hours (or longer) to choose the loans in which they want to invest.  If there are more investors than possible fractions after a set time period, a randomized system leaves the investor with their "fair share" of notes for their loan selections of the day.
 

I believe LC will eventually switch to continuous posting of new loans as they become submitted instead of four daily batches which will further necessitate having loans be available for selection for a set time period.

The Real Solution: Combine Investment Limit per Loan Fraction, a Round Robin System, and Stricter Whole & Fractional Pools by Investor Type as detailed above

nonattender

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #4 on: August 18, 2013, 03:02:43 PM »
If LC cares about the retail, individual investor

Last I checked, LendingClub was not managed or directed by Mother Teresa and the Sisters of Mercy - almost the polar opposites, in fact...
That's not a value judgment, by the way.  I think it's a killer business model.  I'm just not sure why you think they care, now, about retails?

I think the best that can be hoped is that a mechanism emerges which allows investors to fund borrowers whom they themselves acquire.
Prosper had that, at launch, in 2006, as well - "groupmembers" would get first bite on loan requests made by any borrower within groups.
(Does LC have a similar mechanism in place to allow the credit unions who feed their members to be serviced by LC to buy member loans?)

It's all "meet the new boss, same as the old boss" and "everything old is new again", to me... I'm not sure why this is surprising anyone...

You're sort of asking "how do we get LC to retard their growth rate so that a few vocal retail investors can continue making big profits?"...

(Is there a binary option I can buy that will pay me if they don't "care" to do that?)
A little nonsense now and then is relished by the wisest men.

brycemason

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #5 on: August 18, 2013, 03:53:39 PM »
If LC cares about the retail, individual investor

Last I checked, LendingClub was not managed or directed by Mother Teresa and the Sisters of Mercy - almost the polar opposites, in fact...
That's not a value judgment, by the way.  I think it's a killer business model.  I'm just not sure why you think they care, now, about retails?

Common logical error. I didn't say I thought that. I just proposed an antecedent. Although Peter tells us on many occasions that they claim to.

GS

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #6 on: August 18, 2013, 04:10:35 PM »
I think it would be short sighted of lending club to turn their backs on individual lenders.  As more P2P options become available, and saturate the lending side, and as LC tries to expand the borrowing side into much larger business and secured loans, keeping ALL their investors happy will be more of a priority.  I think LC knows this, and will take some action to level the playing field.  If they handle this properly, "P2P lending" could become as synonymous with retirement investing as "stocks" and "bonds".  I would not be surprised if an entity like Etrade tried to buy Prosper or LC.
« Last Edit: August 18, 2013, 05:27:22 PM by GS »

SeattleSun

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #7 on: August 18, 2013, 04:13:57 PM »
"LendingClub could code every account as either institutional (LP, LLC, etc.) or retail individuals."

I am not sure this distinction is as clear cut as you think/propose.  Myself and two of my "business partners" are operating our P2P account as an LLC.  We have an account balance of less than $100k and have never made a loan above $100 and consider ourselves as just three reatail individuals joined at the hips.  We do this to allow shared management duties by like thiniking individuals allowing for time off like vacations, etc for the others partners.  Of course we could always set up three individual accounts.  P2P is not the only small venture we manage this way.
« Last Edit: August 18, 2013, 04:16:59 PM by SeattleSun »

storm

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #8 on: August 18, 2013, 05:03:37 PM »
You're sort of asking "how do we get LC to retard their growth rate so that a few vocal retail investors can continue making big profits?"...

How does giving small investors a chance retard growth?  The loans are funding within seconds.  Whether it is a bunch of small investors or a few big investors, the loan is still funded.  We small investors have thrown in a few of our hard-earned bucks into LC the lat 5-6 years to see what happens.  Now the big guys see we are doing alright, and they want to come play in our new playground too.

I am all for investment controls to give small lenders a chance, but that is just a small fix.  The long term problem is finding enough borrowers to meet the demand of the investors (and vice versa).  What is currently retarding growth is that there are not enough borrowers.  That, and it takes too long for LC to verify the applicant's information and issue the loan.  Maybe we should be asking if Laplanche wants LC to grow that big that fast, and what, if anything, he is doing about it.  I doubt we would get a straight answer, but maybe an idea of how much effort LC is putting in to attract more borrowers right now.  With all the options that prime borrowers have to get money, I think the best way to promote P2P lending is through word-of-mouth.  Allowing small "retail" investors to directly fund the loans is an edge that LC has over the banks, and can potentially lead to that many more referrals.  That is why I think it is a mistake to allow the big investors to squeeze us out.  If this situation continues much longer, there aren't going to be as many happy customers.

flyp52

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #9 on: August 18, 2013, 07:15:01 PM »
I'd rather see LC create a new instrument that is a basket of loans and allow me to buy shares in that.  For example they could offer a basket of $25M Sep 2013 E Grade loans and line up investors to purchase a piece of that.  I'm thinking have an offering window and give each investor, big or small, that signs up an opportunity to purchase an equal share in the basket.  The unpurchased amounts from all the investors that don't purchase their entire allocation is allocated equally among the remaining investors that want more, etc. etc. until all shares are purchased. 

In the limit case if 1M investors sign up, each investor gets to purchase a $25 share.  If 10,000 investors sign up, each can purchase $2,500.  Smaller investors that can't or don't purchase $2,500 take their fill, and the rest of their allocation is offered to investors that want more.  This guarantees that any small investor that wants a share gets one and only the large investors may not get as much as they want.

I can imagine all sorts of variations to meet different investors needs - baskets that have a minimum purchase requirement, different kinds of indices, etc.

As a retail investor that is still picking loans manually, the biggest advantage is not having to compete for individual loans - I would be perfectly happy purchasing an index.


berniemadeoff

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #10 on: August 18, 2013, 07:32:26 PM »
If LC cares about the retail, individual investor

Last I checked, LendingClub was not managed or directed by Mother Teresa and the Sisters of Mercy - almost the polar opposites, in fact...
That's not a value judgment, by the way.  I think it's a killer business model.  I'm just not sure why you think they care, now, about retails?

Common logical error. I didn't say I thought that. I just proposed an antecedent. Although Peter tells us on many occasions that they claim to.

Only way to get their attention is to impact their IPO.  I assure that's all there care about now.

core

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #11 on: August 18, 2013, 08:44:04 PM »
Only way to get their attention is to impact their IPO.  I assure that's all there care about now.

Let's all short the stock and then go on the mass marketing campaign to tell the real story about what's going on and how it's not now p2p, if it ever was.  It ain't stock manipulation if it's the truth.  Salting someone else's well is fun, but it's more fun to make some bank in the process.

DanB

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #12 on: August 18, 2013, 08:52:14 PM »
Brycemason..............As I told Peter some months ago, I'm not commenting on the "forum" anymore but I'll make an exception today.



Stating that "using the website as it is now is "untenable", seems a bit extreme. Shouldn't it instead be, using the website as it is now is untenable imo, or perhaps..................using the website as it is now is untenable to those users who rely on pick services such as mine or services that in one way or another channel users collectively to the same loans? Or users who essentially do nothing more than copy other users?  Would that not be more accurate?

I use LC daily for multiple accounts. Sure it's tougher these days & I've had to make a few minor adjustments, but isn't life itself about making adjustments? .......................Because, unlike you, I'm pretty far from saying "untenable". Then again, I don't use any pick services, & I don't even care what others "filter" for, much less copy what they do.  And no, I don't set my alarm clock, nor do I consistently wake up before 10 am.............or sometimes even noon.

So if one were to accept the flow of the conversation here, I must either be lying or getting totally crap loan choices.  Or perhaps you think LC is setting aside some "special" loans for me..................you know because of my consistently supportive behavior towards them  :)   
« Last Edit: August 19, 2013, 07:53:38 PM by DanB »

berniemadeoff

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #13 on: August 18, 2013, 10:38:08 PM »
Only way to get their attention is to impact their IPO.  I assure that's all there care about now.

Let's all short the stock and then go on the mass marketing campaign to tell the real story about what's going on and how it's not now p2p, if it ever was.  It ain't stock manipulation if it's the truth.  Salting someone else's well is fun, but it's more fun to make some bank in the process.

Hell ya!!!

mo

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Re: Fairer Solutions to Perpetual Excess Investor Demand
« Reply #14 on: August 19, 2013, 01:35:15 AM »
Brycemason..............As I told Peter some months ago, I'm not commenting on the "forum" anymore but I'll make an exception today.

Why not?