It is possible to peg Steem Dollars to USD without the help of exchanges by arbitrage trading. As soon as the price falls below $1 there is an arbitrage opportunity to buy cheap SBD, convert it to Steem as if it was worth $1 and then sell it. As long as the underlying crypto (Steem) has value and as long as the printing rate of Steem Dollars is limited, this can work pretty well: https://coinmarketcap.com/currencies/steem-dollars/
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Unless there is more demand for it on the exchange than there is supply internally to suppress it, which is exactly what happened. If tens of millions of dollars suddenly flow into SBDs on an exchange, there isn't enough supply to suppress that kind of buying pressure to keep prices at a dollar. Which means... anytime a group with a nice stack of cash decides they want to pump SBDs, they can.
Pegged on Steemit but freely exchanged on exchanges is what he's saying. That is how the arbitrage opportunity is artificially made. The intended effect of this non-exchange-based peg would be a lower bound, not a price ceiling.
Correct, and without a ceiling, what is the point?! Also, it's not really even a lower bound, at least not a very firm one. If there is enough selling on exchanges to drive prices down, they will fall too on the internal market. The only saving grace would be to use the convert function in that case to ensure that $1 SBD stays worth $1 USD worth of steem.