Marketplace Lending, Information Aggregation, and Liquidity
34 Pages Posted: 16 Nov 2016
Date Written: November 15, 2016
“Fintech” innovations are redefining the boundaries between financial intermediaries and markets. In this paper, we study the recent experience of Funding Circle, a leading UK online marketplace that directly matches retail investors with small and medium size corporate borrowers. Recently, Funding Circle replaced its auction system, where both prices and loan allocations were determined by the market, with a posted price system, where only the allocation is determined by the market. An important focus of our analysis is the tradeoff between the information aggregation of auctions and their susceptibility to liquidity shortages. We show that auctions generate a price discovery process that reveals information that can improve the prediction of default events. At the same time, increasing difficulties in matching changes in the demand for loans to the supply of funds has led to a fall in the precision of that information over the sample period, and an increase in the volatility of interest rates. We believe this explains the eventual switch to posted prices.
Keywords: Auctions, Liquidity, Fintech, Market Design, Information Aggregation
JEL Classification: D44, G14, G23
Suggested Citation: Suggested Citation