Arbitraging in the Advertising Market Auction
Bloomberg is known for being a company heavily involved in financial matters. On their website was an article titled “High-Speed Ad Traders Profit by Arbitraging Your Eyeballs”, which focuses on the market for Internet advertising.
Internet advertising is growing, and online display ads and search ads such as those on Google contribute to the growth. Display advertisements, such as the banner ads and short videos seen on Youtube videos, also play a huge role in the advertising market; according to researcher Magna Global, one fifth of those ads will be sold at auctions. Technology firms run the exchanges in which billions of ads are sold at the auctions, and the highest bidder, usually ad agencies, will take the slots. Ad agencies are competing for slots in which Internet users, whose information about themselves such as age, sex, location, and Internet history are seen by these ad agencies, pay the most information to.
Arbitragers are those who purchase desired items with the intent on selling them later at higher prices for profit. Because arbitragers are anonymous, no one knows exactly how large the field of arbitraging really is. What these traders are doing is not illegal, but they continue raising their prices for these slots. Anonymous traders, nicknamed the “Chinatown traders” in the article, state that what they are doing is being more efficient within the market, able to give the slots to those that value it the most. The process of arbitraging is also so quick that companies are finding it difficult to keep up. The Chinatown traders explain this is due to companies not being well connected to exchanges, and because they can’t respond to a first auction in time, these arbitragers are able to take advantage to sell these slots at a higher price. As exchanges become more interconnected, price inefficiencies in the market will become increasingly more difficult to find. However, due to arbitraging’s effects on prices, the issue of arbitraging is starting to become noticed by ad agencies. By arbitraging, traders could actually be removing the efficiency of real-time bidding and distorting the markets, such as buying slots that were clicked on less.
Although not in detail, the article addresses the auction process of selling slots to advertisers that we discussed in class. They state in the article, “Advertisers buy Internet spots in ad exchanges, where space is sold to the highest bidder. Even before ads reach the desired audience, they change hands in a complex volley of electronic trades between websites, ad space aggregators, exchanges, data analysts and ad agencies.” They focus much more on the participants of these markets and how actions of the types of participants are affecting the way these auctions are run. The traders are similar to the advertisement agencies in the search market auction; they become the new slots being sold to the advertisers in the market. The interesting part is that according to the article, the traders are so quick to replace the slots they just bought that advertisers cannot distinguish between traders and the advertisers. When traders talk about giving the slots to those that value most, it follows the process of the auction; regardless of the price of the slots, if an advertiser values the slot extremely highly, the advertiser with the highest value will win the slot. The value of the slot, according to the article, comes from the type of advertisement it is and the ad’s accessibility to its audience, which the “click-through rate” is basically. However, what the article seems to focus on is that the advertisers are the ones that hurt from these arbitragers. The payoff the advertisers could get from the advertising could be greater if advertisers could, but the higher prices that arbitragers charge from these slots that they just bought lower the payoff that the advertisers actually get. It is interesting to read more about the details within the advertising market auctions that we learned about in class and how these details affect the market and its participants.
Source: http://www.bloomberg.com/news/2014-11-07/high-speed-ad-traders-profit-by-arbitraging-your-eyeballs.html