Bid Retractions and Programmatic Markets

I recently read a great piece by Andrew Casale titled "How Bid Retractions Can Defeat Ad Fraud" focusing on reducing advertising fraud by enabling buyers to retract bids.  Back in May of '13, we wrote a blog post "The Case For Central Clearing In Ad Tech" that discussed the key structure required to enable retractable bids: central clearing. There are two main functions carried out by central clearing: clearing and settlement of market transactions. Clearing relates to identifying the obligations of both parties on either side of a transaction. Settlement occurs when the final transfer of assets (ad placements) and funds occur.

The first and most meaningful issue is the lack of a true agnostic platform. Since there are no government regulations in ad-tech, as there are in the cocoa futures markets (the example in Andrew's post), there are no uniform standards for players in the market, let alone bid retraction mechanisms.

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The second  issue is the lack of uniform contracting. In futures exchanges, all players agree to standard contract terms between the buyer and the seller, which are enforced by the central clearing party; in the case of cocoa, a licensed warehouse.

The third issue is the notion of possession. In commodity markets, a central clearing party takes control of the money to pay for the transaction and the product to be bought. While RTB exchanges and private markets do take possession of the 'impression', the fact that payment for advertising happens 90 to120 days after delivery makes fair enforcement nearly impossible.

Let's dig deeper.

The first issue - an agnostic platform - clearing trades requires an agnostic platform acting as a utility that supports both sides fairly. Such platforms have formed in other markets via a consortium of key players interested in creating efficiency. But, the efficiency sought was not driven by a liaise-fair market, it was driven by the regulatory regime that all players had to conform to. The efficiency was based on creating a single entity, as there were no advantages to operating proprietary platforms to manage all the same regulations that your competitors had to deal with. So, all the major competitors came together and created a low/no profit entity, co-owned by all, that served the collective need of the market.

Moreover, these agnostic entities were used to determine if the buyer's funds were on account and if the seller's promised quality and quantity of goods were delivered, per the terms of the standard contract. To accomplish such a task, uniform standards of quality must also be established in the market. A central counterparty can't validate a transaction based on buyer and seller DMP data if one side is using Bluekai and the other is using eXelate.

The second issue - no uniform contract standards - in futures markets such as cocoa, the exchange trades a single contract. In other words, think of a form (an actual cocoa contract) filled out with each trade where only the price, time of delivery, quantity, quality, and counterparties change from trade to trade, all other terms are non-negotiable. To facilitate such a standard, time of delivery, quantity and quality are also standardized. Time is traded in monthly increments, quality is based on a contractually defined set of criteria, and quantity is in minimum units of tons. The contract is 47 pages long and cocoa is much simpler than advertising.

Like today's advertising, futures used to lack a uniform contract. Each exchange had its own, and managing the ever growing number of exchanges became a near impossibility; like today's programmatic environment. While I know that some may shudder at this assertion, regulation of futures markets was key to it's growth and the same will be true for advertising.  It is the creation of the CFTC (Commodities Futures Trading Commission), a US government regulatory agency, that brought about the standardization of these contracts. Voluntary measures did not work because there were enough players looking to make a 'quick buck' that messed up the cooperation of the many in exchange for the profit of the very few.

The third issue - possession - central clearing parties have a good deal of power. To enable a fair and orderly market, the central party stands in the middle of every trade (kind of like an RTB exchange but not exactly). Central counterparties sit in the middle of all trades to make sure that the default of one party has a minimal impact on the other. Put simply, a middle-man that insures the transaction. To do that, the supplier gives control of the supply, and the buyer gives control of the funds. While exchanges as we know them today in ad tech do take possession of the 'impression' to facilitate the redirect, buyers do not have funds on account that are debited upon execution. Today's advertising exchanges have contracts structured in such a way that if the buyer fails to pay, the seller is left 'holding the bag', not the exchange. Thus the exchange is not a central counterparty.

The above are just three of the many issues that need to be resolved to make bid retraction a reality. The single most important imbalance in the market is the lack of payment upon delivery. This legacy feature of the pre-digital days of advertising will create significant buy-side advantages in an environment that would allow bid retraction.

So, while bid retraction is a great idea in principal there are fundamental market structures that need to be put in place first. It's not impossible, but given the current state of the market, it is improbable.