Author Topic: Thought Experiment for Folio Traders  (Read 4963 times)

joshmer

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Thought Experiment for Folio Traders
« on: April 29, 2014, 08:46:41 AM »
Theoretically let's say that LendingClub decides there should be more transparency in the secondary market in the future, and therefore decide to implement a database that includes every transaction that has occurred on the folio marketplace.

How do you think this would effect the trading that occurs?   Obviously there would be some hard data crunching of the numbers to see where the true sales are occurring (which can be assumed right now to be near where the lowest discounted loans are listed).  But the bigger question would be do you think it would work towards a very efficient market whereas I would know that if my D2 loan with 26 payments left and a 640 FICO goes late on a payment that I'm going to get between 92-95% on the loan almost every time (I know there are other factors but its just an example).

Just wanted to see what people thought.   I think that at some point there has to be more data opened up to traders, I just hope it is sooner rather than later.

core

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Re: Thought Experiment for Folio Traders
« Reply #1 on: April 29, 2014, 04:50:51 PM »
Since such data would not benefit buyers all that much (meaning new customers who have no choice but LC still wants to retain for whatever reason), and since Lending Club supposedly makes nothing on Folio fees, why should they add such things?  I don't think LC has any reason to help you get your 92-95% (-8% to -5%), especially if that "savings" to you is essentially coming out of buyers' pockets.  People who are liquidating are not desired customers.  And they have shown time and time again that "traders" aren't desired customers either.  They will not do anything to assist either of those two groups in my opinion.

No, I don't think at some point that data "HAS" to be more open to traders.  Why does it "have" to be?  They got by for the last 7 years just fine.  What is suddenly different today?  I don't want my trades published, and so far LC seems to see things the same way.  Certainly they could change their minds in the future, but there would probably have to be some motivation.  If it ain't broke, don't screw with it.  And they've got enough stuff that truly is broken that they should be working on before even considering this Folio voyeurism.

Fred

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Re: Thought Experiment for Folio Traders
« Reply #2 on: April 30, 2014, 12:32:55 AM »
I am with core on this.

Personally, if LC shares the secondary market transactions, this would require me to change a lot of my current strategies.

Besides, making decisions with limited/imperfect information is more fun, especially when a lot of people are trying to do it at the same time. ;-)

Bohb Daishi

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Re: Thought Experiment for Folio Traders
« Reply #3 on: April 30, 2014, 02:48:01 AM »
I think that more information would lead to more efficient markets. New traders would start utilizing new/existing strategies, increasing buy-side competition. As a result of this competition, trading profits would go down substantially since sellers would get much better prices for notes (assuming they knew how to properly price them in the first place).

In the long run, however, the market will probably end up worse off. If us traders don't make any money, we won't have any incentive to provide liquidity. Without liquidity, there is no market. As much as Lending Club hates us, we are a "necessary evil". Who else is going to purchase your junk notes? Investors? I think not.
There are three ways to make a living in this business: be first, be smarter, or cheat.

core

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Re: Thought Experiment for Folio Traders
« Reply #4 on: April 30, 2014, 03:17:33 AM »
An efficient market is one where nobody makes any money.  No thanks.  But I can see where that would appeal to the 7% return'ers and the socialists.

As Bohb said, if you cut off our profits we'll stop buying.  If there aren't any sharks in the pool then you may have to wait weeks/months to liquidate your stuff.  Is that really "efficiency" for you?  Be careful what you wish for.

rawraw

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Re: Thought Experiment for Folio Traders
« Reply #5 on: April 30, 2014, 07:12:44 AM »
I am with core on this.

Personally, if LC shares the secondary market transactions, this would require me to change a lot of my current strategies.

Besides, making decisions with limited/imperfect information is more fun, especially when a lot of people are trying to do it at the same time. ;-)
Folio reminds me of this guy:

Story #2:

By the 1970s, Peterffy was working at a company trying to use computers to make money on Wall Street. (This was a novel idea at the time.)

Peterffy figured out how to use computers to calculate when financial instruments called options were overpriced or underpriced. But he had a problem. It was 1977, and people weren't yet using computers to buy and sell options. They were still standing in trading pits, waving their arms and yelling to do trades.

Peterffy tried bringing binders of computer printouts to the trading floor to guide his buying and selling. But this was slow and inefficient. So he and some engineers tried to build an early tablet computer a proto-iPad to bring to the trading floor. The tablet worked, though one burst into flames on the trading floor.

Story #3:

It wasn't until 1987 that Peterffy was able to take people out of the loop entirely. With the world's first electronic stock exchange, the NASDAQ terminal, traders could type in orders directly into a computer.

Peterffy didn't want to type in the orders. He and his engineers hacked into the NASDAQ terminal and wired it up to their own computer, which traded automatically based on algorithms.

A senior NASDAQ official saw Peterffy's setup and said Peterffy was breaking the rules: All orders had to be entered through the keyboard. He gave Petterfy's group one week to fix the problem.

Peterffy and his engineers came up with a solution. They built a robot with rubber fingers that typed entries into the keyboard. It satisfied the NASDAQ rules. And on active trading days, the robot typed so fast it sounded like a machine gun.

Rob L

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Re: Thought Experiment for Folio Traders
« Reply #6 on: April 30, 2014, 08:47:34 AM »
Actually, the HP-35 calculator was introduced in 1972. Fischer Black and Myron Scholes published their seminal paper on options pricing in 1973.
There were lots of traders standing in the options pits back then with the Black/Scholes algorithm programmed into their HP-35's.
In 1988 Sheldon Natenberg wrote "Options Volatility and Pricing Strategies" and I think that's where I read this.
It's a very good read on options pricing basics.

joshmer

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Re: Thought Experiment for Folio Traders
« Reply #7 on: April 30, 2014, 10:03:08 AM »
I don't agree that it would make all the profit go away in the marketplace.  Otherwise you could make the same argument that no one could make any money in the stock market because they are also trading secondary securities in an open market.   There will be always people willing to sell for less or buy for more depending on changing market conditions, but the interesting studies could be done to see what traders find the value to be at for all of the loans.  Especially those that have payment difficulties.  If LendingClub was really on the up and up they could use the trade statistics to give account holders a better real time marked to market value of their pass due loans (obviously they wouldn't do this because it would take away from their rosey glassed cure rates that they publish).

Just something to toss around on a rainy day.   And no I don't think they have much incentive to change folio because it is not where they generate a large portion of their profits.

rawraw

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Re: Thought Experiment for Folio Traders
« Reply #8 on: April 30, 2014, 04:27:46 PM »
Actually, the HP-35 calculator was introduced in 1972. Fischer Black and Myron Scholes published their seminal paper on options pricing in 1973.
There were lots of traders standing in the options pits back then with the Black/Scholes algorithm programmed into their HP-35's.
In 1988 Sheldon Natenberg wrote "Options Volatility and Pricing Strategies" and I think that's where I read this.
It's a very good read on options pricing basics.
Peterffy became a billionaire through his options trading.

Rob L

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Re: Thought Experiment for Folio Traders
« Reply #9 on: April 30, 2014, 06:24:50 PM »
I didn't quite do that welt; but I did okay. No fires though.  :)

Fred

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Re: Thought Experiment for Folio Traders
« Reply #10 on: April 30, 2014, 11:38:51 PM »
Peterffy became a billionaire through his options trading.

Those who've used Interactive Brokers (Nasdaq: IBKR) in the past should know this guy.

http://en.wikipedia.org/wiki/Thomas_Peterffy