Why Doesn't The Advertising Business Care About Insider Trading?

Hedge fund billionaire Raj Rajaratnam went to jail. So did the Gordon Gekko-inspiring 80s icon Ivan Boesky. And then there was Martha Stewart… 

Why? Because they were all caught trading stocks using privileged information about the stocks being bought and sold -- information that the people being bought from and sold to did not have themselves. In the financial world, that's called insider trading. 

In the media world, it's called an "exchange."

The reason the financial markets (and their regulators) are so focused on insider trading is that if the market is perceived to be unfair, buyers and sellers won't be comfortable buying and selling there. Of course they all know (or think they know) things about the stocks that they hope will give them an edge. But the basic information is all publicly available -- e.g., how much capital is behind the company, how much money they made last year, what they sell, where they sell it, and so on. 

By contrast, think for a moment about what passes for an exchange in the media space. Buyers come to the exchange powered by first- and third-party data about the user, a deep understanding of why they are interested in that individual, and what they are willing to pay for the opportunity to serve an ad to that person. By contrast, sellers come to the market with a piece of inventory that went unsold through direct sales channels, and that will be gone forever in mere seconds if no one on the exchange chooses to buy it.

This imbalance is a key challenge to the widespread adoption of "exchanges" in the premium inventory space. As long as there is a substantial information imbalance between buyers and sellers, sellers will choose to hold back their best stuff for direct sales where the buyer/seller playing field is much more level.  For this reason, most exchanges today are choked with high volumes of very low-value inventory -- all the remnant “dregs” that went unsold by the publisher’s sales team.



This is truly unfortunate for the entire industry. The only thing that today’s "exchanges" have proven is that they can deliver transactional efficiencies paralleling their financial counterparts. It is much more efficient for both buy-side and sell-side to execute transactions in a real-time bidding (RTB) environment than it is in all but the most streamlined direct sales/premium ad-serving environments. And most will agree that expanding the volume of inventory that is executed in a programmatic way is in everyone's interest.

So why is there only "remnant" inventory available in those exchanges? Why are the vast majority of total ad dollars still handled via direct sales? Because publishers believe -- generally rightly so -- that buyers will get the better of them in the programmatic transaction, given the almost-institutional information asymmetry. And they’re loath to give up their most precious inventory for the equivalent of some loose change from under an agency trading desk’s couch cushions.  Furthermore, even where the seller has good information about the user associated with the impression being sold (by working with a leading DMP, for example), most of the "exchanges" don't give them the tools to securely inject that user data into the impression in an effort to drive a higher price. 

The result of all of this is that the entire consumer surplus (the difference between what the buyer is willing to pay and what the seller is willing to accept) almost always goes to the buyer (less, of course, whatever transaction fees the "exchange" is able to extract).

The industry needs to address this problem if it is to take full advantage of the operational efficiencies of automated trading, but those trading mechanisms must be sensitive to -- and accommodating of -- the distinct value of various inventory segments in the publisher’s yield stack.  

·      Sellers need to fight data with data to level the playing field, aggressively adopt the tools and techniques required to understand their audience and what makes individual consumers valuable in the eyes of buyers. 

·     Exchanges need to provide the tools for sellers to both differentiate their inventory with data in a secure and leakproof way (i.e., without spreading it to the four winds) and dynamically manage price floors based on that data to anticipate buyers’ likely willingness to pay.

·      And sometimes buyers will need to pay a little more -- but if the inventory is truly worth it, that’s not such a big "give" on their part.

With the information asymmetry corrected, publishers will see (and capture) the value of the efficiencies made possible by programmatic trading. Otherwise, you’ll see a lot of folks continue to sit on the sidelines -- no one wants to see decades worth of investment in content, environment, and deep first-party consumer relationships eroded. When it comes to protecting a publisher’s core asset, the premium audience behind the premium placement within the premium content, handwritten insertion orders and fax machines really don’t look so bad after all.
1 comment about "Why Doesn't The Advertising Business Care About Insider Trading?".
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  1. Chris Zaharias from Campanja, March 24, 2013 at 1:22 a.m.

    Psst, here's some exchange insider information:

    Facebook is ~20% of the Internet.
    They have an exchange.
    100% of the inventory is above the fold.
    As of Q4 '12 there were <2000 advertisers on it.
    It converts exceptionally well:

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