P2P lending marketplace Prosper today informed investors via email, that it will close down the secondary market, effective October 27th. Prosper does not operate the secondary market itself, but uses FolioFn, operated and maintained by FOLIOfn Investments, Inc., a registered broker-dealer.
The announcement email reads:
A Message from Prosper and Folio Investing
We are writing to let you know that as of October 27, 2016, Prosper will no longer offer the Folio Investing Note Trader platform, the secondary market for Prosper Notes. Prosper has found over time that very few investors are using the secondary market and, as such, has made the decision to no longer offer this service. We apologize for any inconvenience that this causes. Prosper remains committed to its retail investor clients and to providing them a great experience.
Here’s what this means for you: The secondary market trading service will be available as normal until end of day (5:30 pm PST) October 19, 2016. After that time, any new orders to list Notes for sale will not have sufficient time to be completed and processed before the site becomes unavailable to users at the end of day (5:30 pm PST) on October 27, 2016.
Once the secondary market trading service is terminated, you will not be able to sell Notes that you own, and you will need to hold them to maturity.
If you have questions about your Notes or the wind-down of the Folio Investing Note Trader platform, please contact Prosper customer service at 877-611-8797.
Prosper and Folio Investing
Prosper has not disclosed usage numbers of the secondary market in the past, but volume traded is perceived to be low and this is also stated in the email. One speculation is that Prosper decided to close the secondary market to cut costs.
My feeling is that this will deliver a blow to the attractiveness of the Prosper marketplace for retail investors. Even if many investors have choosen not to use the marketplace (which several report does not have a very good user interface) the fact that there is a marketplace delivered some assurance that they could exit at least a larger portion of their portfolios should the need for liquidity arise. Also a one month notice seems to me rather short, given that loans can run up to 60 months and with the changed perception the prices could sink (lower markups, higher discounts) in the remaining month of trading as the number of investors wishing to use this last chance to sell will rise in my view, while the number of investors buying will at best stay stable.
From a legal perspective Prosper never guaranteed that there will be a secondary market as past SEC filings of Prosper stated “The Notes and PMI Management Rights will not be transferable except through the Folio Investing Note Trader platform, or the â€œNote Trader platform,â€ operated and maintained by FOLIOfn Investments, Inc., a registered broker-dealer. There can be no assurance, however, that a market for Notes will develop on the Note Trader platform. Therefore, note purchasers must be prepared to hold their Notes and PMI Management Rights to maturity.“.
Furthermore this move is counterintuitive as the industry is currently talking about ecosystems with services interconnecting. Any third party service already supporting Prosper investors to automate and monitor the FolioFn trading will also be impacted by the change. It seems that no advance notice was given to industry participants of the intentions to close the secondary market; at least I did not hear anything before today’s email came out.
Personally I believe that secondary markets are a very important functionality that p2p lending marketplaces can offer to retail investors and most (newer) European p2p lending marketplaces do have one, except in a few countries like Germany where legal and regulatory hurdles pushed the costs of such a feature so high, that so far none of the marketplaces implemented one.
Usage of secondary marketplaces differ widely by marketplace, influenced by pricing (fees, at par or with markup, discounts), transparency, tools (API), liquidity, and constant availability of loans on first markets. On all European marketplaces that have one (Updated: except Archover), the secondary market is fully integrated into the platform and not provided by a third party. Prosper and Lending Club are therefore an anomaly in this regard, again caused by regulation. My subjective estimate is that on European marketplaces on average about 20-30% of investors use the secondary marketplace function. On some marketplaces that have intermittent loan flow of new loans like Saving Stream or Moneything, I suspect usage number to be much higher and probably above 70% of investors have used them. The other extreme are platforms that designed the feature to be mainly an emergency exit for the investor, e.g. the rather expensive sell out feature on Ratesetter.
I believe that the decision is Prosper specific, or at least US market specific and don’t expect that any European marketplaces will copy this.