The Importance Of The Trader

At the cutting edge of today's technology driven advertising industry reside a group of professionals with an interesting job title: Programmatic Trader. As good as that sounds, given the current realities of media buying, that title is a bit of an anachronism. That said, that job title might not be that out of place given its brethren anachronisms of "exchanges" and "trading desks." By most definitions, a trader buys and sells for the purpose of making a profit. Generally traders are buying and selling on their own account (using their own money, not the client's.) In financial services contexts, those who buy and sell on behalf of others are referred to as brokers - "One that acts as an agent for others, as in negotiating contracts, purchases, or sales in return for a fee or commission." When we think about what programmatic traders do, it is more along the lines of a broker than a trader. With that said, I would argue that will soon change. Over the coming years, facilities and technologies will quickly enable programmatic traders to act more and more like traders and less like brokers.

An interesting parallel could be seen in financial services when the Glass-Steagall Act was repealed. (I could go through a whole prosaic and fact-filled blah blah about the history of the act, but I'll save you the headache.) In short, banks used to use their clients money, deposits on account, to trade and keep the profit for the bank. When the FDIC was created,  our regulators and politicians thought it would be a bad idea for the government to insure deposits while the banks take it to the 'casino'. In 1999 the Gramm–Leach–Bliley Act pretty much repealed that. And so, proprietary trading was eventually resurrected at all the major banks - the banks using their own funds to trade for profit. Why is this parallel to advertising? Well, as soon as agency buyers can actually buy and sell advertising inventory to profit from its price movements they all will.

To us it seems obvious. Media buying practices at the major agency holding companies 'see' more supply and demand than any other market participant, they have the best overall view of the performance of that inventory, and they have the best understanding (and data) in the market to value the transactions. As in all markets, those with the most information, exploit their information asymmetry for a profit. That is not a bad thing!

Helping the market figure out the best price for a transaction is a critical economic mechanism used by markets to efficiently allocate capital. Like most commodity markets, few end consumers (publishers or advertisers) see enough supply or demand to actually understand what is happening in the markets - that is why we hire brokers (agencies) to help us make the trade.  So what is it about the trader that creates value?

In a price discovered market, the trader buys from a seller selling at a price that is too low, sells to a buyer at the right price, and provides other forms of 'insurance' for price fluctuations. Alternatively, traders may buy at a price that is too high and set the correct price through a loss. In a price discovered environment, this activity is a service benefiting the entire market. Why? In price discovered markets,  transaction prices and pricing data is available to all market participants. So, if you bought from me at a price that is too low and re-sold at a higher price, I will know. If I know, I will not make that mistake again! In fact, traders help us all understand what things are worth.

It is very important to note here that the main point was not transparent markets it was price discovered markets There is a big difference. In transparent markets, everyone knows the buyer's identity, the seller's identity, and the price. In a price discovered market the price is known, but buyers  and sellers can flex the level of transparency they afford the market.

The problem we now face with the market structure in RTB and private markets is the lack of price discovery. In such environments, traders can be rent-seekers -  by arbitraging against their clients. Not all do,  but some do so openly.

The fact that markets work better when better market structures underpin them is key to MASS Exchange.