The Role of Regulation and Technology in Segmenting Primary Markets and Security Flipping

67 Pages Posted: 8 Nov 2018 Last revised: 20 Jun 2023

See all articles by Shyam Venkatesan

Shyam Venkatesan

Ivey Business School, Western University

Brian Wolfe

University of Texas at San Antonio

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Woongsun Yoo

Central Michigan University

Date Written: June 18, 2023

Abstract

Flipping is when traders purchase an asset in the initial offering of a security and immediately sell the asset for a higher price in a secondary market. Flipping is the natural result when segmentation exists in the primary market (initial offering), and investors have heterogeneous price beliefs. We provide empirical evidence for two novel types of segmentation caused by regulation and technology in the primary market for FinTech debt securities. Our results show both forms of segmentation increase flipping activity. Additional tests suggest platforms include an interest premium, potentially encouraging flipping and circumventing the investor regulatory restrictions that cause segmentation. Welfare benefits accrue to traders engaging in flipping activity. We estimate that borrowers pay an additional 63 BP in interest to allow platforms to resolve regulatory segmentation and excluded secondary market investors concede an average 288 BP in yield to investors flipping notes.

Keywords: IPO underpricing, Marketplace lending, Peer-to-peer lending, FinTech, financial regulation, technology, arms race

JEL Classification: G21, G23, L81, D53, G28

Suggested Citation

Venkatesan, Shyam Sunder and Wolfe, Brian and Yang, Jun and Yoo, Woongsun, The Role of Regulation and Technology in Segmenting Primary Markets and Security Flipping (June 18, 2023). Available at SSRN: https://ssrn.com/abstract=3281366 or http://dx.doi.org/10.2139/ssrn.3281366

Shyam Sunder Venkatesan

Ivey Business School, Western University ( email )

1151 Richmond St
London, Ontario N6A 3K7
Canada

Brian Wolfe (Contact Author)

University of Texas at San Antonio ( email )

San Antonio, TX 78249
United States

HOME PAGE: http://sites.google.com/view/brian-wolfe/home

Jun Yang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3395 (Phone)
812-855-5875 (Fax)

Woongsun Yoo

Central Michigan University ( email )

Mount Pleasant, MI 48859
United States

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