Author Topic: More gaming of the system ver 2.0?  (Read 14900 times)

Fred

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Re: More gaming of the system ver 2.0?
« Reply #15 on: August 18, 2013, 02:28:37 AM »
My idea is to get rid of API altogether. 

This would upset investors, big and small, including some of the Forum members here.

Fred

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Re: More gaming of the system ver 2.0?
« Reply #16 on: August 18, 2013, 02:40:22 AM »
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.

If there is a way to take short positions in P2P market, there is a lot  of money to be made due to the issues above.  Somebody will hopefully come up with a plan to tap into this arbitrage opportunity, i.e., make the market more efficient.

core

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Re: More gaming of the system ver 2.0?
« Reply #17 on: August 18, 2013, 07:12:28 AM »
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.

So this is what you meant by auction.  You know what, I can actually see them doing this.  Likely?  No.  But it could sure happen I think.  The "extra servicing fee" (hereinafter Bribe) would have to be paid up front in a lump sum rather than added on to the regular servicing fee otherwise that would really complicate the secondary market.  Although I have to admit that would make trading a whole lot more interesting.  If they're going to go to the Bribe system though, the first step should be to eliminate any policies that are contrary to it:  Why let LCA clients step in front *AND* give them a discount on top of that??

What are you guys talking about there is no way you can know where an order originated from.

Yeah I just lost half a night of sleep trying to figure out how in the world Rob could have determined this.  Spill the beans Rob!

If there is a way to take short positions in P2P market, there is a lot  of money to be made due to the issues above.

EXCELLENT idea.  Now there's a real solution.  Wow, can you imagine how fun that would be betting against the borrower?  Get this going, Lending Club.

core

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Re: More gaming of the system ver 2.0?
« Reply #18 on: August 18, 2013, 07:48:15 AM »
Here's an account of something I experience all the time in real life which touches on all these issues.  Investor-to-loan ratio, bidding, and institutions:

In my state we have tax lien sales once a year.  If a deadbeat doesn't pay his property taxes, investors go to the tax sale and pay the taxes and in return receive 24% APR if the deadbeat eventually pays up.  If he doesn't pay you get his house after 2 years.  Assuming he doesn't torch the place first.

Even in the smallest counties, there's an auditorium crammed with investors and sometimes only a few hundred liens to go around.  You are lucky to get $2k invested if you walk in there playing by the rules like an Average Joe.  With the liens in such short supply, here's how the counties deal with that:

For each lien, the computer picks an investor at random and his name is called.  He can either take it, or pass, in which case the process continues until someone takes it.  If you want more liens, the only way to increase the probability of your number being called is to have more accounts.  But that requires bodies in seats, and the names have to be registered well ahead of time.   So what the large institutions do (I'll pick on Wells Fargo here) is create tons of LLCs.  "WF Sharks 1 LLC", "WF Sharks 2 LLC" etc.  Sometimes hundreds of shell companies.  The purpose of the LLC is so you don't need to know what individual will be holding that bidder card ahead of time.  Then they hire drug addicts off the street for the day for $20 or whatever and give everyone a sheet of instructions with the properties to skip.  You should see the parking lot the hour before the event starts, with all these institutions trying to corral their hired hands and toss out the ones that showed up drunk, etc.  Quite a sight!

Here's the wrinkle:

The law allows a bidding process where you can bid down not the interest rate, but the percentage of equity in the deadbeat's house.  It starts off at 100%, but any individual can shout out a lower amount, say 75%, and override the random computer selection.  This means that after the 2 year period you don't get the guy's house; you can only force a sale and take 75%.  I imagine that gets quite messy but I've never been through it.

Every year there are lots of new eager investors who have read the law and show up all prepared to do it up right, but without ever having been there before.  Invariably, the very first lien to be called, one of those new guys will shout out "99%" to start the bidding.  Well, what happens then is one of the Wells Fargo guys will stand up and holler "1%!!!" and take the lien.  This lien's now all but worthless if the deadbeat doesn't pay and they all know it.  The purpose of this is to make it very clear to everyone in the auditorium that if you want to be a "jerk" and bid things down, then you're going to walk out of there with worthless pieces of paper.   It takes about 5-10 more liens like this before folks figure it out and shut up and take what is assigned to them.  Obviously the county treasurer / auctioneer has to endure a lot whining about institutions during the break periods.

berniemadeoff

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Re: More gaming of the system ver 2.0?
« Reply #19 on: August 18, 2013, 09:39:24 AM »
My idea is to get rid of API altogether. 

This would upset investors, big and small, including some of the Forum members here.


It would upset me as well... but why not make a better, fairer system? Prosper could implement this easily by fixing its AQI.

On the whole multiple accounts/gaming thing, LC has to self regulate or else some government agency will do it for them, in a draconian way....
« Last Edit: August 18, 2013, 09:46:36 AM by berniemadeoff »

berniemadeoff

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Re: More gaming of the system ver 2.0?
« Reply #20 on: August 18, 2013, 10:00:30 AM »
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.

I completely agree, the entire P2P market is rigged because the rates are not set by an efficient market process.  LC and Prosper set whatever rates they want, which is why supply/demand is totally out of whack.  Could you image the demand if suddenly the US gov't threw out the auction process and declared that the 10y bond would be sold at par with a coupon of 10%.  All Hell would break loose with the trillions of dollars that would flood in. 

We all clearly prefer the rigged market because our risk adjusted returns are pretty good right now, too good.  Letting the market dictate loan pricing through an auction process would probably mean we will get very low returns (5% or less seems plausible today) until some macro blow-up wipes everybody out and scares everyone out of the market.

Unfortunately, the big investors are onto this, and the "excess" returns we've been getting will be harder (or impossible) to get if us little guys are crowded out. 

Now I'm waiting for an on-line P2P payday lender to come around... I want a piece of those 20%+ returns!

http://www.chicagobusiness.com/article/20130323/ISSUE01/303239981/payday-lender-seeks-big-bucks

Here's another interesting development in the consumer lending space - this is a hot market.

http://www.businessinsider.com/subprime-lender-in-talks-to-ipo-2013-6
« Last Edit: August 18, 2013, 10:10:37 AM by berniemadeoff »

brycemason

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Re: More gaming of the system ver 2.0?
« Reply #21 on: August 18, 2013, 10:24:24 AM »
Here's an account of something I experience all the time in real life which touches on all these issues.  Investor-to-loan ratio, bidding, and institutions:
....
It takes about 5-10 more liens like this before folks figure it out and shut up and take what is assigned to them.  Obviously the county treasurer / auctioneer has to endure a lot whining about institutions during the break periods.

That's a great story, Core, but I'm unclear on why the big bank's "1%!" threat is credible. Let them have all the loans with 1% and they are a big loser.

core

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Re: More gaming of the system ver 2.0?
« Reply #22 on: August 18, 2013, 10:49:56 AM »
That's a great story, Core, but I'm unclear on why the big bank's "1%!" threat is credible. Let them have all the loans with 1% and they are a big loser.

Well there's a few things preventing that from happening:

- You drove hours to get here, took time out of your day, paid a registration fee, and maybe paid a few hired hands of your own.  Do you really want to go home empty-handed?  Knowing that the banks may or may not lose a bit of money isn't much of a consolation.

- The banks probably won't lose much anyway.  Hardly any of the deadbeats let their house get taken; they sell it first or otherwise dispose of it.  Even if one went bad, at 24% APR on the rest of them, the bank probably won't lose too much overall.  They've got the volume for it to even out.  The WF employees in charge of the drug addicts probably don't even have a personal stake in it anyway; what do they care?  As long as they come back to the office with a stack of liens.

- If you're the 99% guy, the crowd is going to blame you for being the jerk, not the bank.  Right or wrong.  There would be a mob scene.  We're allowed to carry guns here, but 15 rounds doesn't last long in a riot. :)

New Jersey Guy

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Re: More gaming of the system ver 2.0?
« Reply #23 on: August 18, 2013, 11:06:23 AM »
Core....I got a great laugh out of that story!

What you need to do is show up the night before with like 40 bottles of really cheap whiskey.  Make several stacks of like 5-6 bottles in different areas where they can easily be found.  Once one or two people find a bottle, word would travel quickly, and nature would take it's course.  It would almost be like an Easter Egg hunt.
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Fred

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Re: More gaming of the system ver 2.0?
« Reply #24 on: August 18, 2013, 12:52:38 PM »
Main points from the story:

1. Bad bots
they hire drug addicts

2. Bad instructions
give everyone a sheet of instructions

3. WF (institution) took the loss

From regular investors' perspective, it is disappointing, but at the end the joke is on "them" (institution and their army of bots / shell companies).


« Last Edit: August 18, 2013, 01:11:02 PM by Fred »

investforfreedom

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Re: More gaming of the system ver 2.0?
« Reply #25 on: August 18, 2013, 04:14:01 PM »
I am wondering whether the big guys themselves have complained about this to LC.  Presumably, they are also trying to frontrun each other to get at the best loans at the quickest possible time.  They can't possibly not notice what we have been noticing--that some folks with deep pockets are gaming the system. 

 

Rob L

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Re: More gaming of the system ver 2.0?
« Reply #26 on: August 18, 2013, 05:39:24 PM »
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?
Just now catching up on my reading today. It would be nice to have a mole in LC IT, but unfortunately I do not. I'm a complete outsider, but not one given to idle and completely unsubstantiated speculation. Let me just call it an educated guess. Unfortunately, I fear we will never know and would bet $100 at 10:1 that I'm right on this.  If some LC insider would like to see me write you a check for $1k please step forward with the evidence. Otherwise that swamp land in Florida is still available ...

Rob L

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Re: More gaming of the system ver 2.0?
« Reply #27 on: August 18, 2013, 06:25:25 PM »
I am wondering whether the big guys themselves have complained about this to LC.  Presumably, they are also trying to frontrun each other to get at the best loans at the quickest possible time.  They can't possibly not notice what we have been noticing--that some folks with deep pockets are gaming the system.
IMHO the "deep pockets" are in the whole loan program (if in LC at all) and couldn't care less about notes. Very messy. THE competition for the retail investor is the small boutique fund, LLP, or rich guy. It is these much smaller entities where investing in notes (very large ones from our perspective, but meaningless to CALPERS, etc.) makes a difference in the bottom line, or provides asset class diversification worth the time. For LC and Prosper there is virtually no barrier to entry (i.e. the cost of an adequate note selection model and rocket speed API software is quite modest). It's simply a very small pool and it doesn't take a whale to make a splash. In the big scheme of things I think all total P2P lending returns at present are chump change to "deep pockets", but I will  certainly defer to Fred on this and would value his opinion and others that have similar experience.

mo

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Re: More gaming of the system ver 2.0?
« Reply #28 on: August 19, 2013, 01:30:32 AM »
It would be nice to have a mole in LC IT, but unfortunately I do not. I'm a complete outsider, but not one given to idle and completely unsubstantiated speculation. Let me just call it an educated guess.

Rob, your claim is exactly unsubstantiated speculation.  You haven't even presented any circumstantial evidence let alone actual proof that what you originally claimed has any merit.  Your's isn't an educated guess, it's just a conspiracy theory.

Peter

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More gaming of the system ver 2.0?
« Reply #29 on: August 20, 2013, 06:55:15 PM »
One thing that Rob L did not consider is that there are many investors using the API now and most of these people have sophisticated credit models. The data set to build a model is finite and so many investors will be choosing the same notes.

A much more likely explanation is that 1-2 large investors came in and 2-3 small investors using the API filled the note.
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