Quote from: noggin-scratcher on November 13, 2014, 11:21:31 PM

Quote from: mjr on November 13, 2014, 06:38:09 PM

I constantly get the feeling, when discussing the FRR, that the people who hate it, hate it because they think they can charge traders more for swaps and they won't notice, that they are "leaving money on the table". This isn't the case, the swap market is competing amongst itself to provide swaps for whatever amount of volume we have. The people who pick the smallest number win. So, I don't think you will see, even if we remove the FRR a huge increase in the rates. The rates will stay as low as the person who wants it the most is willing to go.

I see what you're saying, and I'll admit... the current setup seems very good at keeping rates low most of the time and as a lender I'd love to see them higher, but all the same, I'm skeptical of the idea that the swap market is as efficient as you seem to think. From what I've seen there seems to be (1) a large pool of people who take swaps in the course of trading without looking at them and without much caring what the rate is unless it was ludicrously high; the difference between (say) 0.1% and 0.11% wouldn't register as important enough to pay attention to, and also (2) a large pool of people who lend on 'full auto' or near to it, not wanting to devote time to figuring out an optimal rate and willing to lend at almost any rate down to near-zero.

If you graphed out a supply/demand curve for that, I'm imagining a long segment on both curve where they're close to horizontal - varying the rate having almost no effect on how much demand there is (because demand is primarily driven by traders wanting to capitalise on price movements, unrelated to the rate) or how much supply there is (because depositing/withdrawing fiat is enough of a hassle that it's easier to just 'let it ride' even when rates dip down). If anything supply is likely to vary most by people taking cash out of swaps to trade with or vice versa, again correlating it mostly with price movements in the bitcoin market.

So in a 'pure' market there would be outcomes where the amount of supply/demand at those horizontal segments are significantly unequal, and the rate either skyrockets or crashes depending on which is the largest, and a somewhat less well defined outcome if they're approximately equal, where the horizontal segments intersect and the rate can just freely wander around at random between the point where traders as a whole start to strongly notice their swap costs and the point where lenders as a whole decide it's no longer worth bothering with at all, which is a huge range.

The FRR acts to pick a rate in that range and cluster everyone around it... for all the lip service to a supply/demand market, most of the time the FRR is the rate that everything happens around and your method of picking it makes it slow to react to upward movement but faster to react to downward movement (longs become more in demand => FRR wall absorbs all the extra demand without raising rates for absolutely as long as it possibly can, longs become less in demand => traders cancel their more expensive swaps and the average rate craters).

I feel like the impression you're getting of everyone just wanting higher rates is a result of the simple fact that people who want rates held low have nothing to complain about because the system we have is already doing that so effectively. You seem a little dismissive on that basis but I'd be wary of setting aside complaints just because the people making them seem 'whiny'. People are always going to complain, and always going to be biased, but it'd be nice if there were approximately equal numbers of complaints coming from both sides.

I didn't mean it as a competition between traders and liquidity providers, but rather, as a competition between liquidity providers. Here is an example:

(No clue how to get images to work, this forum is the least user friendly way I have ever had to communicate in my entire life)

http://imgur.com/tXxSkRq

So, there is a "wall" of FRR offers, 1.5 million. There are people who are willing to trade a higher possible return, for a return right now, which is why there is half a million before you even reach the FRR. If you took away the FRR, it would not change the fact that rates will always be as low as the one person who wants the least return. There is a variable but finite amount of demand for swaps, call it x, and there is the response (supply) call it y. If y is greater than x, someone is not getting their funds used, and getting 0 as a return. So, it will always be a race to the lowest rate, with or without an FRR. My personal bot, simply looks to see what is the lowest rate and jumps in front of it. Most people would gladly take something, rather than nothing, and with or without FRR, that won't change. So we, as bitfinex, don't have any horse in the race, as one person mentioned, we would collect more if rates were higher, and it is doubtful that the volume is very closely correlated with the rates. The vast majority of the traders, IMO, don't check or even watch rates. So with whatever the current demand to open positions in, the person who is willing to settle for the least will be the first one to get a return. In other words, I feel like the group of people who wish rates were higher want to act as like a cartel, basically saying "if we all only offer at high rates, we will all get high rates", but in practice, it is impossible to prevent people undercutting.

Luckily, our volume is growing rapidly, and I think that as it continues to grow (we have been about half of the volume in USD/BTC lately), this will necessitate more swaps, and it stands to reason, rates will rise. I guess, the way I see it, is that people who currently use the FRR are basically saying "I will take whatever rate, I don't want to manage it, and I don't want to deal with it", and if you got rid of the FRR, they would just put offers a little lower than whatever the current lowest is, and in fact, could drive rates even lower (assuming that they want to invest the roughly 60-120 minutes to write the bot).

Like, I have seen other people complain that as rates go down, people close their swaps and get a new one for lower. That is going to happen regardless, there is no way to avoid competition, and if anything, I think that people who use the FRR are the ones who care the least about the rate rising (I could be wrong). One other thing, that I just was thinking of, was this...the way the FRR is calculated currently is public knowledge, so what if, someone wrote a bot to always offer at the currently calculated FRR? If enough people used that bot, the situation would be roughly identical to how it is now, and there would be nothing we could do to "remove the wall", because people can put their rates in as whatever they like.

I guess what I am trying to say is this, I know some people want higher rates, but the rates will always be just high enough to get you to offer the swap and no higher. That is not our policy, it is simply the way markets work. Markets try to find the most efficient price, and that is the price where the offerers are offering at, by definition, the lowest price. So, I personally think that a lot of the rage against the FRR is really a rage against competition in a market, and although we are obviously working to make a better tool, I think that no matter what we do, basic market competition is something no one can escape.