Aftermarket: how does it work

I think that the facility to mark up by 3% and immediately resell on FC (and FK I suppose) for instant profit with no share of the risk is an abomination*. I hope Assetz do not follow this route. The secondary market should be easily available purely for investors to gain access to their money when required (Assetz 0.35% charge for this seems very moderate to me) and is an essential part of good P2B platforms.

If large investors need to be brought in to ensure big loans are filled without expensive underwriters, maybe this could be done near the end of a slow filling loan, rather than at the beginning, and openly have part (or all)  of their 0.35% selling fee waived, rather than being encouraged to just play the system as on FC. Would this be a cheaper way for Assetz than the underwriters?

*Having said that I have occasionally marked up by up to 0.5% on FC to cover selling fees, but mostly recently it has been at par just to rapidly offload low return loan units in order to reinvest (FC charge 0.25%, which is low).

I can see how an active secondary market on FC is tempting as an additional revenue stream and given the larger volume of loans appearing on the primary market over there I agree some would not fill without the aid of the flippers. So they have their place, but I  have to agree in the principles stated that it distorts the crowd due-diligence, by quite some margin. Maybe limit the mark-up to 0.5%, so anyone wanting to help get a large loan underway can act as a quasi-underwriter without any loss. And no limit to the mark-down side to help with an 'oh my god' moment. That way you would gain from a slightly busier aftermarket without attracting too many flippers to distort the primary.

Thinking a bit more about this. The fact that AC automatically dices and slices your bid into bite size chunks, and add in that the majorty of loans are fixed rate,  means there would be a hugely increased risk of a market being cornered for the purposes of SM selling than exists with FC. With FC at least flippers need to make multiple bids (albeit some have mastered the art of this) to get saleable chunks and have to chase rates down to stay at the premium level for resale. If the aftermarket allowed decent premium on AC, I could see that even I would seriously consider massive short term over exposure through single button press in the knowledge that I could do a quick spin at a profit. 

On the other hand: discounts: interest rate environment is not a stable thing: I cannot think of a valid reason why allowing discounts to give some one an exit route on what might at that time be an otherwise unattractive rate shouldn't be allowed.

And premiums to at least cover up to the cost of sale: why not ?

Buyers on the primary market have their money tied up from bid to drawdown, which is usually weeks but can be months. Getting loan parts on the secondary market, with no waiting time, is therefore (in most cases) a relative bargain which may explain why there are usually not many about.

I'd have no issue with premiums being permitted at a level that enabled sellers to cover their selling costs plus a modest return for their dead time. 50% of the loan rate (accrued on a daily basis) might be reasonable. No more than that, because the money is not on risk until it is lent. A difficulty, however, is that the dead time is very variable. As we have seen today, some loans fill and are drawn very quickly. I would not want these to become a flippers' paradise.

A possible solution, if it could be implemented in software, would be for the maximum premium to vary depending on the dead time, calculated either from the end of the auction or (preferably) from when the seller's bid was made. The latter would give some encouragement to early bidding. This could be expressed as a formula:

Max premium = 0.35% + R*t/2

where R is the loan rate and t is the dead time, determined as above.

In order to calculate the premium from when a bid was made, the system would need to retain a permanent record of when bids are made. I've no idea whether it does.

Perhaps this is overcomplicating things, but I think a change along these lines might encourage the development of the secondary market without opening it up to abuse.

I should say that this is particularly a feature of markets which are 'pricing to liquidity' rather than risk, and therefore more of a function of variable rate loans.  See other thread on that whole topic.

I don't see anything wrong with a premium or discount, in principle. This is, afterall, how bond markets function, and I suspect building a functioning bond market for small businesses was one of the aspirations of the founders of Funding Circle. At the end of the day, nobody is forcing buyers to pay a markup, and if sellers get too greedy they will run out of buyers.

You make a good point about the risk of insider trading/unethical practices though, and this is a risk with the current model of what is analogous to a number of private exchanges at which loans can be traded. I suspect the solution is better information sharing between P2B providers when it comes to borrowers seeking funding elsewhere. Possibly, this could be enforced by the regulation. In the present sitution with this particular borrower, I think FC should really downgrade the loan to prevent trading as soon as they know the borrower is seeking funding on a different platform with the intention of clearing their loan. If they aren't aware of this though, they can't take action.