Will Wall Street Quants Corrupt Online Advertising?

Recently there has been some hubbub about advertising becoming too much like Wall Street. The critics worry the advent of ad exchanges, where media is “traded” in real-time like financial securities, will give rise to advertising “quants” who will trade media just to make a buck — and put the ad industry at risk in the way leveraged debt imperiled global financial markets.

As someone who’s been a “quant” both in the Wall Street sense and in advertising, I admit there are parallels between Wall Street and Madison Avenue today, and advertisers should carefully consider how real-time bidding will impact their industry. But just because mathematical minds are invading the ad-trading industry doesn’t mean they’ll bring it down the same way Wall Street quants did.

My personal story as a Wall Street quant-turned-advertising exec sheds some light on the differences between Wall Street and Madison Avenue. My life as a quant started in the early 90s. I was working on my PhD in Artificial Intelligence at Stanford and NASA, focusing on building the brains for autonomous, self-driving robots. Whenever I’d speculate on how my research would be useful in the real world, I’d think, “Well, someday we’ll send an autonomous robot to Mars.” Toiling in my lab for a pittance, I began to realize that applying my mathematical modeling skills to Wall Street might be more tangible — and lucrative — than dreaming about putting a robot on Mars. So in 1996 I became a Wall Street consultant — or, more colloquially, a quant. I passed on my mathematical knowledge to hedge fund financiers and traders so they could make more money.

Around the same time, I also consulted with packaged foods companies, helping them apply predictive data models to target the customers with mayonnaise and cereal coupons. In those days, the people applying quantitative approaches to advertising were most often called database marketers. They “mined” historical data on their customers and used it to target marketing campaigns, typically through direct mail and then as the years went by, through email and on their websites, and finally via paid search and banner ads.

Today, of course, marketers have adopted sophisticated, real-time bidding platforms to buy highly targeted “audiences” – buying display and video ads on the fly to reach in-market consumers right when they’re researching products or are ready to make a purchase. Enter the “real-time bidding” platforms for online ads that quants are supposedly hovering around, trying to find ways to “take wealth” from the trades.

Advertisers love real-time bidding because it turns display advertising into a precision science and a real-time market – cutting costs, improving campaign performance, and improving ad targeting. This is similar to how Wall Street trading works, but I don’t think quants will descend on real-time bidding platforms and try to sink the system for pure financial gain. Why? As I mentioned above, that’s just not possible from a technical standpoint. On a real-time exchange, as a user visits a page, an amazing technological triumph is happening behind the scenes. Your browser gets the page from the website’s server. Part of the page says “oh, you have to ask Google’s ADX exchange for an ad.” So your browser asks ADX for an ad. Then in real-time, ADX pokes a number of advertising companies’ servers to say “hey, right now I have this one little rectangle on this page for sale – how much would you bid on it?” As the servers evaluate whether to put an ad on this page, they can leverage information about the page, the user (anonymously), and other factors about the rectangle.

This is similar to the way a quantitative trading system might evaluate a real-time offer on NASDAQ to buy or sell a stock on a financial exchange, based on the stock’s p/e ratio, institutional holdings, and so forth. After ages pass from the computer’s perspective and the blink of an eye to us, the advertising company’s servers shoot back a bid to Google, saying “OK I want to pay $0.002472 for this rectangle and I want to show a peanut butter ad.” In the same way that NASDAQ clears trades, the ad exchange figures out the highest bidder and serves that bidder’s ad back to the person on the other end of the browser. Despite real-time “trading” of ads, there is no risk of quants turning online advertising into a shady money-making game. The opportunity to serve an ad (a single “impression” in ad speak) is conjured into existence when a person visits a Web page, and it is consumed the instant this person is matched with the right ad. There is no cigar-smoking man buying an impression at a low price and dumping it next week at a higher price on some unsuspecting naive buyer, simply because impressions just don’t live that long.

George John is CEO of Rocket Fuel Incorporated, a digital advertising company that delivers innovative and insanely effective online campaigns for large and growing brands.


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