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Author Topic: Fairer Solutions to Excess Investor Demand

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Fairer Solutions to Excess Investor Demand
OP: August 17, 2013, 11:00:00 PM
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!

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Fairer Solutions to Excess Investor Demand
#1: August 17, 2013, 11:00:00 PM
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.
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Fairer Solutions to Excess Investor Demand
#3: August 17, 2013, 11:00:00 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
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Fairer Solutions to Excess Investor Demand
#4: August 17, 2013, 11:00:00 PM
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Fairer Solutions to Excess Investor Demand
#6: August 17, 2013, 11:00:00 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.
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Fairer Solutions to Excess Investor Demand
#7: August 17, 2013, 11:00:00 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.
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Fairer Solutions to Excess Investor Demand
#9: August 17, 2013, 11:00:00 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.

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Fairer Solutions to Excess Investor Demand
#12: August 17, 2013, 11:00:00 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 know because of my consistently supportive behavior towards them  :)   
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