Commentary

How Is Bond Trading Like Online Advertising?

I love our clients. They are so insightful and always provide for interesting and intellectual discussions about our business.

Which leads me to today's post. I was visiting with the CEO and the SVP of Operations at a large online publisher and we started talking about ways to increase revenues and efficiencies. The CEO asked what kind of skills are needed to best manage the online ad business and make sure that the revenue needle is pegged at all times. To my surprise and delight, the SVP answered, "bond traders."

That got me thinking about what a great question (and answer) that was. And provided me a topic for a quick post.

To digress, some background on how I got into this business.

After graduating from Duke with my MBA, I got into the derivatives "trading" and portfolio management business. I experienced it both from the "sell side" (working for large banks) and the "buy side" (working for a boutique asset management firm). 

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I hypothesized that there were many similarities between financial book management and online advertising management (little did I realize how right I was!) and founded my company as a result.

A Day in the Life of a Bond Trader

What is it like managing a portfolio of financial instruments? Most of the time you are evaluating your "book" and determining what trades can be made to improve the composition of the portfolio. This means considering not only the trade itself, but also how it fits within the existing book of trades. We generally called this optimization. Sound familiar?

There were a set of "levers" that could be pulled; we could buy or sell bonds, enter into a swap, buy or sell options, etc. so that the portfolio better matched the current market situation. We had systems that helped us perform the analysis and make the trade as well.

We could also "shade" our prices (when we were market makers), bidding more aggressively for a bond (or trade) if it fit our book and/or lowering our offer (the price that we sold at) when we had an overabundance of similar assets. 

As that industry matured, we developed tools to provide more transparency so that our customers could see what we had available to sell and so we could see what our partners had to offer. The tools, which were updated in near-real-time, streamlined transacting and book management. 

In online advertising, shouldn't we be looking at our business in a similar way? Shouldn't we be thinking about our ad contracts as a "book" of business? What levers can be pulled to change the profit  potential of our book? (See my prior post for some ideas). 

We all use the term optimization. But are we using it to describe our book management or simply a single campaign? Want to buy traffic (a bond)? What should you pay for it, given your current set of ad contracts? Too much or too little demand for your premium inventory? By how much should you shade your prices?  

Why not leverage technology (as we did as traders) to provide visibility into our daily revenue and inventory? And to provide our customers direct access so that they can book a trade directly, while updating availabilities in real time? 

Bond Trading?

Getting back to the impetus for this post, should we be hiring "bond traders" to help us manage our ad business? Maybe. Maybe not. But the attributes that bond traders possess are certainly a good fit here:

-          Analytical minds that are not afraid to leverage data to make informed decisions.

-          Confidence to pull all of the available levers to increase revenue.

-          Numbers-driven, with the ability to think creatively.

-          And, for better or worse, "MBA-like" training.

5 comments about "How Is Bond Trading Like Online Advertising?".
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  1. Joelle Kaufman from BloomReach, August 7, 2009 at 6:14 p.m.

    Steve - this is an interesting take on what sorts of people and skills we need to make online advertising as good as possible.

    That said, I don't think there are many individuals who select and do their own bond trading. Most buy bond funds managed by experts who work with the traders. This is because there is so much information needed to calculate value and manage risk. I wrote about this in March 2008 - http://www.adify.com/vertical-ad-networks-and-ad-exchanges/.

    There are many more opportunities for online advertising than there are bonds and fewer auditable analytics that can be used to assess the value of those opportunities. The value of an impression is different to different advertisers as well - so the advertising analog of the bond trader must understand the unique goals of the campaign and the psychology of the target audience in addition to the analytics of optimization.

    Best,

    Joelle

  2. Cameron Hulett from Acceleration, August 10, 2009 at 10:18 a.m.

    Hi Steve

    Love the thinking and completely agree. I've been on this thought track for a while seeing that I work in both the online ad and the hedge fund spaces. Online ads are basically a currency, with exactly the same liquidity and optimisation issues as any financial market. The parallels are near perfect.
    Trading platforms like adexchanges prove the point and the way Google is planning their AdExchange 2, shows the future gap for companies like FatTail and Adify (no wonder Joelle commented on this post).

  3. Charles Richard from Outsell Inc, August 24, 2009 at 8:12 p.m.

    The complexity of the information business has exploded and like the Big Bang theory says of the universe, that complexity is ever-growing. Buyers (advertisers) insist on quantification of ROI for the many-fold explosion of options, and they set the rules in this buyers' market. Publishers and advertisers can now engage with hundreds (thousands counting the insignificant ones) of ad networks and many electronic ad exchanges, including, ContextWeb's ADSDAQ, Microsoft's AdECN, Yahoo Right Media Exchange RMX, Google's Doubleclick AdExchange, eXelate behavioral targeting exchange, UK-based MediaEquals exchange and others. Note that in Outsell's 2009 Advertising and Marketing study, 22% of B2B advertisers say they use ad networks and 13% use ad exchanges. In this article, Steve Pelletier's quote of an executive of a large online publisher reflects this by saying the kind of skills needed to "best manage the online ad business and make sure that the revenue needle is pegged at all times are found in bond traders."

    This mushrooming complexity of the ad marketplace has created opportunities for emerging businesses that help manage the blur of options, the analytics, and in some cases, that shift a portion of the ad transactions to the control of program-trading-like systems. AdMeld, Rubicon, FatTail and Pubmatic Premier provide solutions designed specifically for large media companies. As an example of this new complexity, the vocabulary describing Premier could have come from an operations research or management science textbook: "a combination of advanced real-time optimization technology and dedicated team service that work together to manage ad networks and increase revenue. Default Optimization detects, in real-time, the highest paying ad network to fill publisher inventory when a default occurs ... Frequency Optimization predicts ad network pricing for publishers on frequency-based campaigns and automatically allocates impressions for maximum ad revenue. Creative Filtering ensures the publisher's creative acceptance policy is enforced with every ad network .... Blocklist Maintenance updates blocklists as needed based on your direct sales relationships to eliminate conflict with your direct sales force."

    The hiring challenge is that sales executives must combine coping and optimizing skills. The MBA-like qualifications Pelletier suggests are necessary for coping with the analytical complexity while his four critical attributes touch on the skills necessary to drive the revenue up-side. Publishers pick up an edge in this market by co-developing with advertisers dynamic, in-the-moment, solutions conceived, guided and delivered by this new type of creative, data-driven, lever-pulling pro that would indeed be comfortable sliding into the role of a bond trader.

  4. Kerry Walker from fertility authority, August 25, 2009 at 9:47 p.m.

    Steve,
    I loved this article. I too was a bond trader! After getting my MBA, I traded convertible bonds for almost 9 years. After a 2 year break, I got thrown into the online media world and am now VP of Business Operations for www.fertilityauthority.com.
    I am learning as I go along, and would love to chat with you sometime.

  5. LauRA Sheridan, August 27, 2009 at 11:15 a.m.

    Interesting. I was a Bond Trader for over 20 years and in the end a deal is a deal and if you can pay attention and by the way attention is free and you don't have to pay for it. Have the courage to pick up the phone and do a deal and the stomach to ride the roller coaster when it gets to the loop to loop and basically courage is stepping up even though you know you might get stepped on you can succeed. The best thing about Bond Traders are you are either in or out with them and they know how to do the sniff test and they either do business with you or not. They will tell you to go to he double hockey sticks one minute and in the next they can have lunch with you like nothing ever happened. Every business is like bond trading when you think of it. You need a buyer and a seller in order for a deal to be done and for anyone to make money. We used to have a phrase many years ago "everyone has to eat" You were either done on a trade or not and your word was your word and you never, ever went back on your word and busted a trade because that could leave you busted. Everyone in the end wants to make money to feed their family and Bond Traders just do it in a way that is right up front. Everyone has a little Bond Trader in them and always wants to do a deal that makes them money.

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