How AirTM calculates the USD — VEF exchange rate

Context

AirTM can be described as a peer to peer market where people exchange dollars in AirTM for money in other places (Banks, E-wallets, Gift Cards, Cryptocurrency)and vice versa. One of the common trades in the AirTM Market is the Venezuelan Bolivar to Dollar exchange which happens at the fair market price.

AirTM Pricing Strategy

The goal of AirTM is to maximize the dollar buying and selling transactions. In order to achieve this the exchange rates need to be as close as possible to the fair market rate.

The easiest way to find the fair market rate would be to allow our users to place limit orders. However, that would come in detriment of financial inclusion. Most of our users are not traders, nor would we like them to be. AirTM has therefore taken the “lightly managed marketplace” model that Uber popularized.

Source: https://techcrunch.com/2017/05/25/anatomy-of-a-managed-marketplace/

Indicators

In order to find the fair market rates we need to monitor supply and demand for dollars in AirTM by looking at the active trades at the three levels of the funnel: Posted, Accepted and Completed Orders.

  1. We monitor the balance between outstanding (created) USD purchases (green) VS outstanding sells (dark green), USD Accepted and Completed orders.
  2. The previous 72 hours of these 3 indicators.
  3. The average bid-ask spread and comparing it to the 5 day standard deviation of the exchange rate.
  4. The previous 30 days of created and completed user-orders* to help us understand overall usage.
  5. Acceptance and completion rates of user-orders* to reveal what the impact of a market unbalance is for our users.
  6. Finally, we look at the stages at which user-orders* get cancelled to have a deeper understanding of market dynamics.

* User-orders are users that have made an order. (i.e. if a user makes several orders they count as one). This helps understand data at the user level and filter out their behaviour.

Procedure to determine USD/VEF rate changes and spread

Please note, we are continuously improving the design and testing of the rules that will make the pricing algorithm.

The second phase of the transaction funnel, acceptance rates (orders accepted / created), become more price elastic than the first phase (order requests) only when rates come close to the break-even point for arbitrage and acceptance rates start to decline. Therefore the equilibrium point is found where acceptance rates are close to 100%. On the other hand, once they reach 100% we do not know whether the spread is too big and we are sacrificing transaction creation — growth. Therefore, we decided we need to maximize transactions by managing acceptance rates to be just below 100% acceptance.

Action. Order acceptance rates have a standard deviation of 15% for USD/VEF. If we decide to take action on 75% of the cases, control limits are 99% and 88% for USD/VEF. Once the acceptance rates pass control limits we should take action moving the the exchange rate or even the spread. We tend to favor spread changes for currencies with functional price feeds.

Direction. The outstanding USD orders determine the balance of the market, based on that we determine the direction of the exchange rate movement.

Magnitude. Recent analysis of USD/VEF indicate that the acceptance rate has a price elasticity of 1.45. Price elasticity alone does not determine the exchange rate movement since the market participants’ tolerance is proportional to the spread they gain on every transaction. Larger-than-spread movements produce fear in an already uncertain market. Volatility and acceptance rates determine the spread and ultimately the daily change limits for the exchange rate.

Manual changes are done every day at 10:00 am Mexico City time, and if there are abrupt changes to the rate throughout the day we update accordingly.

If you have any questions please conact me directly at raul@airtm.io. I’ll be happy to answer.

Thank you :)

Raul Sánchez

CFO at AirTM

Twitter: (@raul3820)

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