If you go into any major hedge fund or Wall Street firm today you will likely find graduates of Baruch College’s Masters of Financial Engineering (MFE) program working at the trading desk. The MFE program at Baruch is where many algorithmic traders learn their craft. But not everyone coming out of that program goes to work on Wall Street. Some choose a very different course.
Simon Hermiz, Kenneth Chan and Richard Postelnik all had an entrepreneurial yearning. Sure they could have made great money working at a big bank or hedge fund but they wanted to do something different. They started NoteX360 before they graduated from Baruch because they feel that p2p lending and the broader alternative lending market could benefit from efficient aggregation and execution technology that is available in other asset classes.
Hermiz, Chan and Postelnik have spent most of their careers in finance with backgrounds in lending, trading, and technology. They have a combined 20-years of financial industry experience working at companies like Bank of America Merrill Lynch, BNY Mellon, Fifth Third Bank, Houlihan Lokey, and Pico Quantitative Trading.
After hearing about p2p lending, Hermiz attended the LendIt Conference last year in New York to learn more. He saw there was a huge opportunity to bring equity style execution technology to this new asset class. And he realized he could help build the technology that would help p2p lending become a serious asset class.
So, the three partners went about building the NoteX360 software while continuing with their classes at Baruch. They attracted some angel funding although they would not disclose how much. Regardless, they had a very low cost structure because they did all the development themselves.
Order Management and Execution for Institutional Investors
What does NoteX360 do exactly? They help institutional investors access p2p lending by executing and managing orders for them. They offer both a semi-automated and fully automated service.
In the semi-automated service NoteX360 will provide normalized market data, order management, routing, and reporting. Here they will provide their own APIs to accommodate clients who have their own systems that have been developed to invest across multiple asset classes.
In the fully automated service NoteX360 will send orders from their own algorithms. The client decides on the mix of investments and NoteX360 does all the order execution and account rebalancing with no need for the NoteX360 APIs. Of course, in both services NoteX360 will use the APIs of the platforms to execute all their orders.
Right now, NoteX360 is available for investors in both Lending Club and Prosper. They are focused on the US market first but they see their future as a global player. Their first international platform that will come online will be Funding Circle UK later this summer. NoteX360 also seeks to tap into the broader alternative lending market and start aggregating auto, middle market, commercial real estate, and private equity debt.
Bringing Trading Technology to P2P Lending
During our conversation Hermiz mentioned speed of execution several times. In previous jobs Hermiz and his team have worked on low-latency trading platforms where speed is critical. This is the technology that Hermiz and his team are looking to bring to p2p lending.
Speed of execution is important because as the platforms scale they will be processing many thousands of orders simultaneously. These orders will need to be executed in a timely fashion. Hermiz believes that with Notex360 investors will get superior performance and scalability.
Clients have been using the NoteX360 software on a trial basis and will continue to do so until the end of May. The NoteX360 team will be demoing their software at LendIt 2014 next week and investors will be able to stop by their booth for a 1-on-1 discussion. They have also just launched their blog, called Quant Blog, that will focus on the quantitative side of the industry.
Building out the Infrastructure
It seems that 2014 is the year where the p2p lending ecosystem is getting established. We have a long way to go but we are clearly getting started and it is great that institutional investors have a choice in execution platforms.
These are good times for both retail and institutional investors alike. There are still opportunities for retail investors to browse through loans and handpick which loans to invest in. At the same time, through companies like NoteX360, institutional investors can get very fast order execution in a fully automated environment.
Peer to peer lending is starting to come of age.
Personally I’d be much happier with Lending Club and Prosper dictating the speed of investments to ensure a level playing field rather than all these 3rd party startups adding a layer of fees to provide high-speed services (which will then advantage those investors at the expense of the rest). It’s the “flash boys” story being written all over again in another market.
If these guys are good coders and entrepreneurs they should create a new thing (with a new name that doesn’t sound like XBox360) rather than an add-on service that shouldn’t be necessary.
What if you couldn’t trade stocks after you bought them without paying a 1% transaction fee and selling to a very illiquid market? That’s what folio FN is right now for p2p. A healthy secondary market supports a primary market, and in order for p2p to take the next step and become a real financial player, there needs to be an efficient way to trade notes.
The article does not mention Folio, so that’s another discussion entirely. What they are describing is more akin to HFT, not Folio or the reselling of notes. “Speed of execution is important because as the platforms scale they will be processing many thousands of orders simultaneously.” But not to worry, I’m sure the intention is to bring HFT to the Folio/secondary market as well.
As to whether or not one “needs” these types of things for an efficient market, it’s up for debate. I have no problem with a P2P investing time horizon of 1-5 years (the time it takes for the note to be repaid). That is the core transaction taking place, everything else is just a derivative. Not every market “needs” a time horizon of milliseconds or a secondary trading platform. Liquidity and speed don’t always make markets safer, often quite the contrary, and often opening the door to abuse for those who exploit gray areas of advantage (as has been shown several times in the last decade in a number of markets).
Just an opinion, of course!
Even if speed was not an issue investors would still need ways to invest across multiple asset classes easily. So, there will always be a demand for a service like NoteX360. And yes, it would be ideal if speed was not an issue but that is the reality of the p2p landscape today.
And the secondary market is a pending issue to investors. I think we will see some improvements here in the next 12 months and within two years I expect the secondary market offerings will be robust and unrecognizable compared to what we have today.
Hi Hippo387,
My name is Simon one of the Founders of NoteX360. I appreciate your comment and understand your concern. What we are offering is an efficient and cost effective way for institutional investors to access the p2p market. This increases liquidity for lending platforms and diversifies their investor base allowing them to scale. The low-latency aspect of our services refers to our OMS, which handles all the order processing. We will be aggregating thousands of orders from institutional clients that need to be processed efficiently. We also do all the orders checks and comply with all the order rules set by the platforms. Lending Club, Prosper, and other lending platforms have very strict rules on how you can use their APIs and do a good job segmenting the retail investors from the institutional investors. For example, Lending Club restricts the number of times you can access their APIs per minute and Prosper has a similar rule. We support these efforts. Our goal is to have a fair, efficient, and thriving marketplace.
On a side note, there are already a number of very large investors in this space who have built their own in house low-latency execution systems. These investors have large budgets and can afford to hire people like us to build their technology in house. What we are doing is offering the same high performance technology to the broader institutional investor market who can’t afford to hire a technology team to build and maintain their execution infrastructure. We are actually leveling the playing field for most institutional investors and eliminating the technology barrier.
Peter, you write:
” I think we will see some improvements here in the next 12 months and within two years I expect the secondary market offerings will be robust and unrecognizable compared to what we have today.”
Two years? Why so long? Come to think of it, why has the secondary platform always been so slow to evolve and/or improve in the first place?
There is little incentive for Prosper and Lending Club to create a more robust second market. These guys get their money first from origination fees and second from servicing. Their volumes are so small and the institutional money that represents the bulk of investment capital are investing with portfolio management or securitizations in mind. That a second market exists is what counts, that it’s robust and actually provides real liquidity is a secondary concern at their current growth points.
As Prescott says there has been little motivation for Lending Club or Prosper to create robust secondary markets, they merely had to have one that functions.
This is why it has taken to long. But I am convinced a fully functioning secondary market will come because many institutional investors are now demanding it. They want a fully robust market where they can trade whole and fractional loans just like they can on the bond market. I think we will see a new secondary market launch within 12 months but it will take some time to get traction which is why I said it might take two years.