The Role of Regulation and Technology in Segmenting Primary Markets and Security Flipping
67 Pages Posted: 8 Nov 2018 Last revised: 20 Jun 2023
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: Suggested Citation