We Need To Rethink Marketplace Fees If We Want Better Liquidity

Originally posted in AdExchanger We can thank the long struggle between advertisers and agencies for the fee structure used throughout today’s online advertising industry. Agencies have always wanted to pass marketplace fees on to advertisers, but advertisers only want to pay media costs.

As a result, a significant portion of the industry hides transaction costs in the media price. Transacting environments nearly always charge the publisher by deducting a fee from the buyers bid. It is unclear if any transaction business in the industry has been able to layer its fee on top of the bid.

This struggle between agencies and advertisers has hamstrung the whole industry by forcing the use of a fee structure that fails to yield the best result for anyone. I believe that moving to a make-or-take model can fix this and improve market liquidity for everyone.

In the end, everyone seeks to get the most value out of any transaction, even when that transaction is buying services from a marketplace. The most obvious strategy is to maximize our own outcomes. Given that we know we will all act this way, does every fee structure for the services of a marketplace have the same result? No. The best model is one in which everyone’s interest are aligned, including buyers, sellers and the marketplace itself.

‘Going First’

There are two types of participants in a market, and I’m not talking about buyers and sellers. We need to look at the participants of a transaction in a different way.

In every transaction, there is someone who “goes first.” More specifically, they are the first party – it could be either the buyer or seller – to state the price at which they are willing to do the deal. That information creates liquidity. The marketplaces in which lots of buyers and sellers are willing to broadcast their price need far fewer transactions to be liquid. In contrast, the markets where the price at which buyers and sellers are willing to make a deal are secret need many more buyers, sellers and transactions to be liquid.

That being the case, it doesn’t matter if you are a buyer or a seller, “going first” is clearly a benefit to everyone in the market. So, the side creating the benefit should be rewarded and the side consuming that benefit should pay. In a marketplace, a fee structure that accomplishes that objective is called a make-or-take fee structure. In other words, if a buyer puts in a buy order before there exists a sell order to match with it, the buyer gets the reward. It is also true the other way: If the seller puts in a sell order that must wait for a buy order to match, the seller gets the reward.

This way you can always choose to go second and keep your desired price secret until you see someone on the other side that wants to make a deal at your price.

Make-Or-Take

This strategy makes for a business model where buyers and sellers are rewarded for participating in the creation of a crowdsourced “book” of supply and demand that all participants have access to. In stock markets, the side that is “going first” is referred to as making liquidity, while the side that is “going second” is said to be taking liquidity. Hence the name: make-or-take model.

In real terms, this means the current financial exchanges, such as the New York Stock Exchange or NASDAQ, charge market participants who “go second” about $0.30 for every 100 units, of which they pay the participant who chose to “go first” about $0.27. The difference, $0.03, is the exchange’s revenue. The implication of this model is that those who choose to “go first” in the market actually get paid to trade.

For a long time, folks in the industry have dreamed about a central repository that enables buyers and sellers to understand at what price inventory will clear and how much is available. But if buyers and sellers receive no benefit from listing their intentions in this repository – meaning there is no payment for “going first” – no one will do it.

That is why the dream of a giant catalog of available inventory has not materialized. There is no mechanism in the market to create that incentive.