I've written tons of posts regarding the FRR. I feel though they are largely ignored by the people who have to decide on this topic. Instead most here stick to their positions by ignoring opposing arguments and repeating their own.
So I will just comment on your post as detailed as I can for the last time and then go quiet and just take the necessary actions if the problems remain:
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.
This is highly debatable and very possibly false. Correct is that the rate could be as low or even lower in times of high supply but that doesn't mean that the FRR doesn't artificially keeps the rate low. Realistically the orderbook starts at 1% (cap for autoborrow). From there on it's a race down to the bottom. If what you say is correct we should see a roughly equal distribution from 1% to the lowest offer. this is evidently not the case though.
What we see most of the time is a deeply stacked orderbook often to the lowest pip (0.0001%) then a massive FRR wall and then some offers with quite a bit of space in between and then empty...a large gap until 1% because nobody really expects his offer to get taken any time soon if it is behind a +2m wall that is constantly replenished.
This alone shows that the FRR is not indifferent to the price discovery but in fact has a huge influence on the effectively reached rate.
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.
So then why doesn't his race start at 1% but at the FRR?
Do you remember when a month ago Bitstamp had the 30k bitcoin limit sell order on their book? Was this order indifferent to the market? Of course not this wall had a huge influence on the market and so does the FRR wall.
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.
When the offerbook ran out of autoborrowable funds yesterday, it absolutely had an influence on the market. If people want to undercut, let them but why give them a tool that through your method of calculation lets tons of dumb people create an artificial wall that is not even that effective at lending out their money. Often enough money sits for several hours or days at the FRR before finally taken. If these people didn't have the FRR they would have their money sitting at higher rates creating depth for the offerbook or not having it on the book at all because they forgot to even put in a new offer. But now these "dumb money" guys have a way to ride down with a huge wave.
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 remember that not too long ago you basically said the opposite and expected rates to get much, much lower in the longer term (which is a natural assumption as the rate of BFX swaps is much higher compared to bond markets etc. creating a natural arbitrage opportunity adjusted by the default risk of BFX.
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).
Maybe these people would be too dumb to even have their money lent out continuously? Why give them a super cheap way to constantly drive down the rates instead of having limit orders creating depth to the book? Markets this size (relatively small) are not nearly as efficient as you might think. Somebody who doesn't even care about at which rate his money will be taken will absolutely not permanently readjust the rate.
Also the FRR is not even that good at getting your money lent out:
As BFXDATA shows 733,000$ of swaps came from FRR offers while over 5 million came from fixed offers and manually filled demands. The current size of the FRR is about 2 million and was like this in that time frame. This means your money won't necessarily be even lent out that quickly at FRR and it also means that the vast majority of "deals" were done below the FRR. Why does this artifical wall has to depress the whole market?
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.
Haha, that's a clever thought. But why would you assume that users would use a third party provider as frequently as an in-built feature of your site? And why would you assume that a third party provider would use the same faulty algorithm? Also having a third party provider would lead to competition, people making other, better bots, advertised with "adjusts more quickly to a rising market" etc.
But the thought is still clever because you should ask yourself, why would you provide a such a faulty tool yourself?
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.
For me it's not necessarily about higher rates (I commented muliple times that I consider 1% as absolutely ridiculous unless there is a bubble or something happening) it's about more consistent rates and more efficient price discovery, because as it stands right now the FRR disrupts this discovery.
It's nice you are there to talk about such features. Other companies would not even consider talking to the community about that. But if you really want to defend the FRR (in it's current form) please answer this:
In the last two days (during this short lived upswing) the entire FRR wall was eaten (+3m) at a rate of 0.07%, after this the complete offerbook was cleared out up to 1% (some people's offers were rejected because of no reserves). Interestingly though the increase of total swaps was just about 3.4m at max. And in the time when the offers were at 0.7 to 0.9 % even then FRR came in and offered money for scraps (0.09%)
Do you consider this to be efficient price discovery? Why does the rate adjust so slowly upwards and misprices in obvious situations (offer for 0.07 when the lowester offer is 0.7) but gets drawn down so quickly?
In a thick orderbook that incentivizes people to search for the best rate they can get and not fight some artificial whale wall of dumb money the orderbook would have never been cleared out and rates would not haven risen above 0.5% but they would also have been at 0.2% to 0.3 for longer before and after the rally instead of being surpressed like this. It was like this at the beginning of the year when the FRR would rarely accumulate more than a few hundred thousand dollars and then the dumb money came in.
