Given the interest in the side-conversation that has sprung up about paying people in BitUSD, I feel almost guilty bringing us to back to the initial question. But for completion, and given I raised the question, I feel I must at least for a moment. Perhaps a new thread on paying people in BitUSD is warranted?
Now, why are market-makers reluctant to make a tighter market? Let me summarise the responses.
One response given is that market-makers don't want to hold BitUSD because they do not want to miss out on BTSX price gains. But any individual has a simple solution to this. They can separate their bullish BTSX book (either through direct BTSX holdings or short BitUSD) from their market-making book. If holding BitUSD is so painful in the market-making book, why not just add to the bullish BTSX book to compensate?
That leaves 2 real concerns for market-makers:
1) they will find it difficult to move out of BitUSD without a haircut due to the low demand,
2) there is market movement risk on the inventory when holding BTSX if it falls, or holding BitUSD if BTSX rises
On (2), market-makers do not actually require a 'guaranteed' profit as some suggest. Market-makers can still make good profits on more volatile pairs, as they do in a number of active crypto markets. They just need to step in and 'discover' the price level and spread where they can earn enough profit (equal to spread times volume) to compensate for the volatility. This does not even require any price anchor such as a peg. The issue is that buyers and sellers are staunch in their current positions, without a middle ground.
The essential problem seems to be the current impasse between buyers and sellers. Holders of BitUSD are reluctant to sell far below the peg, maybe because issuance at the peg has conditioned them they should not accept less. Traders that could potentially employ BitUSD (e.g. as a hedge against other cryptos, for arbitrage or market-making profit) will not step across the gap to buy because it is an instant loss to them when they sell again.
I think this problem could resolve when most of the shorts are on 30 day expiries, which will increase buy-side demand in the market as much as required to guarantee a peg price within 30 day rolling windows. That would give the confidence for traders to buy without the concern of getting a haircut, increasing demand and liquidity. It will also allow market-makers to come in confidently and serve the role of minimising these discounts for more urgent sellers. It may reduce supply significantly in the short term, but that may not be such a bad thing.
I think we need to ask a very critical question - what do shorts have to gain by keeping their grandfathered positions, versus rolling them over and improving BitUSD as a product and prospects for BTSX growth? I don't necessarily think they should be forced out, but let's openly tackle the concerns they might have.
I think until the grandfathered shorts are rolled off, the price where supply and demand meets is currently at a discount that will shrink over time. Therefore BM's discussion about a discount to the peg being acceptable, if the price behaviour is similar to USD, may also be a useful one to reset expectations for current holders of BitUSD, and bring sellers to where they need to be at the moment.
While longer term it is important to boost demand from merchants, employees etc, I do not see these as solving the current dilemma in such an early stage for the currency.