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Offline Troglodactyl

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Persistent interest rate competition in shorting
« on: February 17, 2015, 03:54:58 AM »

As much as I love being able to short to myself at near 0 interest and harvest yield, I think it would be better if shorts competed to offer higher interest persistently, rather than only initially.

My idea is to allow shorts to be bought out and taken over part way through the term by someone offering higher interest.  Such a purchase would effectively force the original shorter to exit at the current feed, and would only be possible if such an exit was profitable, or at least break even.  The original shorter would receive his original collateral, plus the difference between the current value of the bitAssets and the initial value at creation, minus accumulated interest.  The purchaser would pay for all of this in order to assume ownership of the short position.  The expiration date would remain the same, only the interest rate would increase.

With this change, interest rate competition is no longer a separate competition run in each block, but persistent ongoing rate competition, so it can no longer be gamed by opening shorts in low competition blocks when no one else is watching.  Also, holding both sides of a short to harvest yield risks exposure to the asset as it should, because the short position may be taken over by a genuine bull willing to pay higher interest for increased BTS exposure, leaving the harvester with the asset unhedged.

Let me know if any of this is unclear and I'll try to expand on it.

Offline Troglodactyl

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Re: Persistent interest rate competition in shorting
« Reply #1 on: February 28, 2015, 04:41:17 PM »
*bump*

Offline xeroc

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Re: Persistent interest rate competition in shorting
« Reply #2 on: February 28, 2015, 05:56:59 PM »
*double bump*
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Offline Bitcoinfan

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Re: Persistent interest rate competition in shorting
« Reply #3 on: February 28, 2015, 06:11:07 PM »
I proposed this same idea a while back.  It is not viable right now because you are deincentizing shorters (when there are so little) from providing liquidity and collateralization in the markets. If this rule was in place, nobody would want to short, or would hesitate to do so, drying up possibility of growing the volume of bitassets.  I think for now it is more complexity that we don't want to fiddle with. 

But seeing as you have an eye on this as well, we should take this up in the future when the overall market cap is healthier. 


https://bitsharestalk.org/index.php?topic=14217.msg185174#msg185174




Offline Troglodactyl

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Re: Persistent interest rate competition in shorting
« Reply #4 on: February 28, 2015, 07:05:29 PM »
I proposed this same idea a while back.  It is not viable right now because you are deincentizing shorters (when there are so little) from providing liquidity and collateralization in the markets. If this rule was in place, nobody would want to short, or would hesitate to do so, drying up possibility of growing the volume of bitassets.  I think for now it is more complexity that we don't want to fiddle with. 

But seeing as you have an eye on this as well, we should take this up in the future when the overall market cap is healthier. 


https://bitsharestalk.org/index.php?topic=14217.msg185174#msg185174

Thanks!  I think the greatest risk is negated by only allowing such takeovers when the BTS/BitAsset feed is below the entry point (I would add at least the interest due as a margin to this).  This way the initial shorter is guaranteed not to take a loss because someone else took over his short position; the only risk due to such takeovers is failing to profit as much as he could have if he'd offered a more competitive interest rate.

Complexity is a very serious drawback, and likely this will be superfluous once the markets are more active.  The problem now is that there are lulls when there is very little competition.

Offline Troglodactyl

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Re: Persistent interest rate competition in shorting
« Reply #5 on: April 16, 2015, 12:55:39 PM »
Update: The problem now is that with expiration and the forced cover at 110%, the ceiling on the sustainable market cap for the sum of all MPAs is Min([BTS Market Cap]/3, [BTS held by bulls expecting a 10% rise within 30 days]/2).

By making interest rates persistently competitive, shorters could not short at 0% interest and hold indefinitely.  Since they would be paying interest, there would be greater incentive to buy and cover even without expiring shorts and penalties.  Shorts could be opened rapidly at 0% interest to meet sudden demand for MPAs, but those shorts could be recollateralized by anyone offering higher interest as soon as the demand for leverage on the growth of BTS increased.

Offline Markus

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Re: Persistent interest rate competition in shorting
« Reply #6 on: April 16, 2015, 02:11:35 PM »
So if I'm short and the BTS price drops I get to keep my position. OK, I lose money but I knew the risk.

On the other hand, if the BTS price rises somebody will snatch away my short-position offering slightly higher APR and I miss out on the rise.

You're leaving me the risk but taking the reward.

Currently people can only short at 0% (even to themselves) if there is an under-supply of shorts. There's no need for a fix here.

Offline Troglodactyl

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Re: Persistent interest rate competition in shorting
« Reply #7 on: April 16, 2015, 10:46:36 PM »
So if I'm short and the BTS price drops I get to keep my position. OK, I lose money but I knew the risk.

On the other hand, if the BTS price rises somebody will snatch away my short-position offering slightly higher APR and I miss out on the rise.

You're leaving me the risk but taking the reward.

Currently people can only short at 0% (even to themselves) if there is an under-supply of shorts. There's no need for a fix here.

No, you have the proposal wrong.  If the BTS price rises and somebody snatches away your short position, you get the full profit from the rise that occurred before they outbid you on interest.  If you still think the interest rate is lower than anticipated BTS growth at that point, you outbid the lowest interest short and end up short again.

The reason this fix would be necessary is that it would eliminate the need for shorts to expire, because paying interest would encourage shorters to cover any time there was excess BitUSD rather than harvesting yield with lower than average interest self shorts.

There is definitely need for a fix here.  The 30 day expiration combined with the 10% discount on expired shorts pretty much guarantees that BitUSD will generally be scarce and overpriced by about 10%, because it's guaranteed that if BitUSD holders refuse to sell, within 30 days someone will be forced to offer feed + 10%.  Interest rate competition taking place independently in every block and then locking in for a month also makes no sense.

Offline starspirit

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Re: Persistent interest rate competition in shorting
« Reply #8 on: April 22, 2015, 10:15:59 PM »
As much as I love being able to short to myself at near 0 interest and harvest yield, I think it would be better if shorts competed to offer higher interest persistently, rather than only initially.

My idea is to allow shorts to be bought out and taken over part way through the term by someone offering higher interest.  Such a purchase would effectively force the original shorter to exit at the current feed, and would only be possible if such an exit was profitable, or at least break even.  The original shorter would receive his original collateral, plus the difference between the current value of the bitAssets and the initial value at creation, minus accumulated interest.  The purchaser would pay for all of this in order to assume ownership of the short position.  The expiration date would remain the same, only the interest rate would increase.

With this change, interest rate competition is no longer a separate competition run in each block, but persistent ongoing rate competition, so it can no longer be gamed by opening shorts in low competition blocks when no one else is watching.  Also, holding both sides of a short to harvest yield risks exposure to the asset as it should, because the short position may be taken over by a genuine bull willing to pay higher interest for increased BTS exposure, leaving the harvester with the asset unhedged.

Let me know if any of this is unclear and I'll try to expand on it.

Troglodactyl,
Based on above, you may be interested in this which I believe achieves what you want and more...https://bitsharestalk.org/index.php/topic,15880.msg203776.html#msg203776
Its still awaiting critical feedback though.

 

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