Markets vs. Exchanges - Setting The Ad Tech Record Straight

It's time to set the record straight. It's time to pause, listen, and contemplate a very basic question: how is a market different from an exchange? In many industry conversations, I find myself running headlong in to a common misconception that conflates exchanges and markets. Let me begin by asking you to think of your definition for both of those and ask you to temporarily forget them. So, let's level-set, let's define...

A market - A medium that allows buyers and sellers of a specific good or service to interact in order to facilitate a transaction. - investopedia

"[counter-parties] convey their bid and ask quotes and negotiate execution prices over such venues as the telephone, mass e-mail messages, and, increasingly, instant messaging. The process is often enhanced through the use of electronic bulletin boards where [counter-parties] post their quotes. The process of negotiating by phone or electronic message, is known as bilateral trading because only the two market participants directly observe the quotes or execution. Others in the market are not privy to the trade, although some brokered markets post execution prices and the size of the trade after the fact. But not everyone has access and not everyone in the market can trade at that price. Although the bilateral negotiation process is sometimes automated, the trading arrangement is not considered an exchange because it is not open to all participants equally." - The International Monetary Fund

An exchange - A marketplace in which securities, commodities, derivatives and other financial instruments are traded. The core function of an exchange is to ensure fair and orderly trading, as well as efficient dissemination of price information for any securities trading on that exchange. - investopedia

"An exchange centralizes the communication of bid and offer prices to all direct market participants, who can respond by selling or buying at one of the quotes or by replying with a different quote. When two parties reach agreement, the price at which the transaction is executed is communicated throughout the market. The result is a level playing field that allows any market participant to buy as low or sell as high as anyone else as long as the trader follows exchange rules." - The International Monetary Fund

For advertising, key factors such as brand protection and the protection of pricing strategies for both buyers and sellers need to be accommodated. Not every buyer wants to do business with every seller and vice versa. So, for a true exchange to work for advertising, significant additional innovations are needed above and beyond what fin tech offers, to protect inventory from commoditization. In other words, enabling buyers and sellers to understand what things are worth without necessarily divulging who the buyer or seller was to the broader market. We call that a price discovered market with counterparty transparency and transactional opacity.

An exchange is a marketplace with information that is relatively standardized and is much more readily available to all market participants. An exchange is better in establishing a 'clean and well lit place' for buyers and sellers to come together. The easier is is for buyers and sellers to make deals and understand what they are buying and selling, the greater the benefit to the aggregate economy. Dark and opaque markets only benefit a small number of participants, usually at the expense of the buyers and/or sellers using those markets.

There is actually a way to measure this, its called 'Kaldor–Hicks efficiency'. Under Kaldor–Hicks efficiency, an outcome is considered more efficient if it can be reached by arranging sufficient compensation from those that are made better off to those that are made worse off so that all would end up no worse off than before, a win-win. That is the economic objective of the exchange: make sure there is sufficient benefit to both sides so that both sides prefer transacting in an exchange over a market. In advertising, that means advertisers may pay higher CPMs, but the efficiency created would mean that actual eCPMs are lower. In other words, pay a higher price, buy less, but get more value; a better deal for both sides.