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BSIP: 0074
Title: Margin Call Fee Ratio
Authors:
  Jerry Liu [email protected]
  Christopher Sanborn [email protected]
Status: Installed
Type: Protocol
Created: 2019-09-07
Discussion: https://github.com/bitshares/bsips/issues/164
Worker: TBD

Abstract

This BSIP provides a solution to charge a fee from margin call trading.

Motivation

Bitshares community becomes more and more aware that BTS need a powerful economy model, one simple selection is to charge the tradings and buy back BTS using the accumulated fees, as did in many exchange platform tokens, the continuous income can help to provide smartcoin liquidity and sustain BTS price. Margin call tradings are potential to contribute a big part of the income to the system, however up to now the margin call trading is not charged, we need to find a suitable way to get this part of system income.

Rationale

Margin call fee can be seen as to pay the cost for smartcoin supply and stabilization, it is unrelated to market fee sharing.

To ensure the debt positions can always be closed with sufficient smartcoin, it is more feasible to cut off part of the traded collaterals as fee, instead of smartcoin.

As the margin call fee ratio may be obvious higher than market fee, the margin call orders should be placed at the real price without margin call fee to avoid misleading the buyer.

Specification

Fee Parameter and Margin Call Order Price

Add one new parameter, Margin Call Fee Ratio (MCFR), for each smartcoin, which is controlled by the smartcoin owner. This fee ratio will modulate the Maximum Short Squeeze Ratio (MSSR) when determining the Margin Call Order Price (MCOP):

margin_call_order_price = median_feed_price / (MSSR - MCFR).

Here, margin_call_order_price is the price at which margin calls will enter the market order book, and median_feed_price(1) conveys the "even exchange" price between DEBT and COLLATERAL, as reported by the price feed publishers. Both prices are expressed in units of DEBT / COLLATERAL.

This new calculation of MCOP differs from previous behavior. Previously, margin calls entered the book at the Maximum Short Squeeze Price (MSSP), defined as:

max_short_squeeze_price = median_feed_price / MSSR.

The MSSP is retained under this BSIP as the collateralization threshold at which global settlement can be triggered, but it no longer determines the order price.

Note (1): In the core source code, as of this writing, what we here call median_feed_price is called settlement_price, although it represents the median reported price feed. Even though it would match current code, we have preferred not to use the symbol settlement_price as a synonym for median feed price in this document for two reasons: (1) the value is not identical with the price at which force settlements occur, due to the Force Settlement Offset (FSO), thus the symbol is confusing, and (2) BSIP-0071 uses the symbol settlement_price to refer to the price at which force settlements occur, inclusive of the FSO, and we do not wish to add ambiguity by using a different definition here.

Fee Calculation

Review of order-matching sequence:

A margin call will enter the book at the MCOP. However, if at the time the call enters the book, (or any time thereafter in response to a price feed update), it can be matched with an existing limit order at a more favorable price, it will take that order. This means that the match_price will be some price no worse than (from the perspective of the callee) the MCOP:

match_price >= margin_call_order_price. (when margin call is a taker)

If no immediate match is found, then the call order will wait on the books (as a maker) for a future limit order to take it. In this case, the eventual match price is exactly the order price:

match_price = margin_call_order_price. (when margin call is a maker)

Calculation of fee, general case:

When a call order is matched to a limit order and they exchange X amount of smartcoin, this BSIP proposes that two distinct quantities be calculated: the amount of collateral which the limit order receives from the call order in exchange for X, and the total amount of collateral that the call order relinquishes to satisfy obligations including the margin call fee. If the MCFR parameter is zero, then these two quantities are equal, and the behavior is unchanged from before. But if the MCFR is non-zero, then the relinquished collateral will be a greater quantity than what is payed to the limit order. The excess is to be paid to the smartcoin asset owner as the Margin Call Fee.


limit_order_receives = X / match_price

call_order_relinquishes = (X / match_price) * [MSSR / (MSSR - MCFR)]

margin_call_fee = call_order_relinquishes - limit_order_receives.


This calculation results in a Margin Call Fee which is proportional to the amount of collateral paid to the limit order to buy X amount of smartcoin.

Calculation of fee, maker case:

Note that in the case when the margin call enters the book as a maker order (i.e., when it was not able to immediately find an existing favorable limit order), the match price will be identical to the order price, which allows the forgoing calculations to simplify as follows:


limit_order_receives = X * (MSSR - MCFR) / median_feed_price

call_order_relinquishes = X * MSSR / median_feed_price = X / max_short_squeeze_price

margin_call_fee = X * MCFR / median_feed_price


The above simplification offers two insights into the Margin Call Fee:

  1. The reason why Maximum Short Squeeze Price is retained as the Global Settlement threshold is because this is the price that determines the total amount of collateral a call order must relinquish under least favorable conditions, and,

  2. That the MCFR can be interpreted as defining a fraction of the feed price that establishes the maximum fee rate paid by the callee. (I.e., the fee will not exceed MCFR * X / median_feed_price.)

Fee Floor

Because the effect of the Margin Call Fee is to reduce the amount of collateral offered by the margin call to buy back debt, there is a danger that the margin call could offer less collateral than the "even exchange" value of the debt (as reported by the price feed publishers), making it unlikely to match the call with a buyer. To prevent this, the implementation should include a floor wherein every place that MSSR - MCFR appears, it is replaced with:

(MSSR - MCFR) —> max((MSSR - MCFR), 1.000).

This will ensure that the amount of collateral offered by the margin call is never valued less than the quantity of debt which the call seeks to buy. At the same time, however, it may mean that the asset owner receives less collateral (or even no collateral) than they are expecting in fees. Asset owners should be advised not to expect to collect a fee rate greater than (MSSR - 1.000).

Non-technical Summary

In summary, this BSIP proposes that the Maximum Short Squeeze Price, which previously established both the price at which margin calls offered collateral and the collateralization threshold at which Global Settlement occurs, be separated into two distinct concepts:

  1. Margin Call Offer Price — The price at which margin calls offer to sell collateral in order to buy debt, and,

  2. Maximum Short Squeeze Price — The most extreme price at which a call order will be required to relinquish collateral in order to satisfy the combined obligation of buying debt and paying the margin call fee. Because the margin call must hold at least this much collateral (per unit debt) in order to relinquish it, this also becomes the collateralization threshold at which Global Settlement can be triggered.

Copyright

This document is placed in the public domain.