The turbulence created by speculation in GameStop shares has highlighted the lack of transparency on trading platforms. Roger Wattenhofer thinks it is time for a change, and calls for more open data not just in financial transactions, but in many other areas.
The drama that unfolded around GameStop shares was in one sense helpful, by putting the spotlight on a generally murky side of the financial market. The episode began with a discussion among members of an investor forum on the Reddit website suggesting that the short-selling of GameStop shares had reached impossibly high volumes. A short sale (selling a share now and buying it back later at a hopefully more favourable price) is actually only permitted if the short sale is secured by a borrowed share. If a stock has been sold short excessively, there is very little danger in buying shares, because the short sellers of these shares must buy them back. When buyers pile into a share, the price goes up. This makes it an investment with virtually no risk, creating a form of stock market perpetual motion financed by reckless short sellers.
Can the system still be trusted?
But did retail investors on the Reddit forum make the right call? It’s hard to be sure, as it’s so difficult to access the relevant type of information. The ban imposed by many large trading platforms on the buying (but not selling) of GameStop shares has merely fuelled conspiracy theories. Suddenly there were doubts whether the number of GameStop shares in circulation was actually correct, and whether the entire system could be trusted.
When it comes to trading platforms in the blockchain world, however, the situation is quite different. On the Ethereum platform in particular, "decentralised finance" is becoming increasingly popular. The idea is to construct the entire trading platform as a decentralised smart contract application. To give an example: to swap Bitcoin for Ripple, you simply send a transaction to the corresponding smart contract. As soon as the transaction is in the Ethereum blockchain, it is visible to all users (in anonymised form).
Smart contracts even make entirely new forms of trading possible. A Uniswap smart contract, for example, allows trading even without the generally required swap partner. If I want to swap Bitcoin for Ripple, I do not need to find a counterparty looking to exchange in the other direction, I simply execute the swap using the smart contract. The smart contract instantly makes the necessary adjustment to the exchange rate. It’s a mystery to me why our trading platforms still lack transparency in the year 2021. In terms of technology, there’s no justification.
Greater transparency is needed
There is a universal need for more open data. The current coronavirus crisis shows that Switzerland also has plenty of ground to make up at the political level. For a start, very few critical data are released that might help to combat the pandemic. In my opinion, it would be useful for the Federal Council not only to provide information on the latest measures it has taken, but at the same time publish all the data and documents their decisions are based upon.
I would like to see a radical paradigm shift towards greater data transparency on the part of the federal government and public administration, as well as other central bodies such as the trading centres mentioned previously. If, for example, the EU refuses to publish its contracts with vaccine suppliers, that’s not simply a question of poor governance. After all, the vaccines are paid for with taxpayers’ money, so surely citizens have the right to know what terms were agreed?
Open data as standard
In a democracy, the government and administration are ultimately employed by the people. The right of public scrutiny by the media as a function of press freedom should therefore be extended to the right of automatic and comprehensive transparency. is the correct approach, but it must become standard. There are of course exceptions to this automatic transparency: citizens’ personal data, medical confidentiality, anonymisation of public sector employees, secret service information, etc. But we need to ensure that the majority of data and documents are publicly accessible by default. This is technically possible and affordable - all that’s lacking is the political will.