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Marketplace Lending, Information Aggregation, and Liquidity

34 Pages Posted: 16 Nov 2016  

Julian R. Franks

London Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Nicolas Andre Benigno Serrano-Velarde

Bocconi University

Oren Sussman

University of Oxford - Said Business School; Ben-Gurion University of the Negev; University of London; University of Oxford - Said Business School

Date Written: November 15, 2016

Abstract

“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

Franks, Julian R. and Serrano-Velarde, Nicolas Andre Benigno and Sussman, Oren, Marketplace Lending, Information Aggregation, and Liquidity (November 15, 2016). Available at SSRN: https://ssrn.com/abstract=2869945 or http://dx.doi.org/10.2139/ssrn.2869945

Julian Franks

London Business School ( email )

Institute of Finance and Accounting
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 x3449 (Phone)
+44 20 7724 3317 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Nicolas Serrano-Velarde

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://https://sites.google.com/site/nicolasserranovelarde/

Oren Sussman (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 926 (Phone)
+44 1865 288 805 (Fax)

Ben-Gurion University of the Negev

1 Ben-Gurion Blvd
Beer-Sheva 84105, 84105
ISRAEL

University of London ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 926 (Phone)
+44 1865 288 805 (Fax)

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