For most people, trading equals buying low and selling high. Typical traders will run there own stock or inventory and look for quick in and outs in any given market place.
In financial markets arbitrage is the practice of taking advantage of a price differential between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices (Wikipedia definition). My appreciation of the term arbitrage also includes the notion of the capitalization being “risk free” i.e. the practice described above is done simultaneously such that no risk is incurred.
My colleague Jonas Rundgren brought my attention the other day to the emerging practice of “arbitrage” in the online advertising space. Impressions, clicks and actions are referred to as “currencies” and the arbitrage lies in capitalizing on the imbalance in conversion rates between cost per impression, cost per click and cost per action.
For example, if you know a historic conversion rate of impressions of financial services to clicks of financial services you can start trading when an imbalance occurs.
Let us assume that the market cost per thousand impressions (CPM) for relevant publishers/ site owners is 2€. Let’s say the standard historic conversion rate of financial services is 1%. This would mean that a thousand impressions would give you 10 clicks. In a balanced market, the financial services cost per click (CPC) should be 100x the cost per thousand impressions (CPM) i.e. 200€. If this is not the case there is an arbitrage opportunity.
Publishers (site owners) will be more or less willing to settle for anything else than CPM deals. Let us assume they are indifferent. Opportunities in this case will arise from assymetric knowledge about conversion rates (historical data, publisher data, assessment of offering in question, seasonality). Assuming that the CPM and CPC prices are constant, a higher than average click through rate will allow market makers to buy CPM and sell CPC making a margin off the imbalance. A lower than expected conversion rate will allow market makers to sell in CPM and buy in CPC, again making a margin off the imbalance. A real opportunity, in real dollars, occuring every day.
Some maybe sceptical as to the real value in understanding this? But seeing that impressions, clicks and actions are the new currencies of the next century, with trillions of CPC, CPM and CPA transactions every day, there is a tremendous amount of money to be made in trading them. Only issue is that few players on the market have the adequate data to do it successfuly. And those that do hardly have the competency to understand how to manage risks and structure a trading outfit.
5 responses so far ↓
JR // March 7, 2009 at 12:57 am |
I find the parable to the finacial market and how the word arbitrage has been misenterpreted by the online industry interesting and a bit odd? Arbitrage for the mediabuyer online is always associated with risks but also as you point out possibilities.
On a large evolving market where the internet is new and fast growing but the market is still immature the oppurtunity is really huge for a player with finacial means and experience. However on the more mature markets the phenomenon internet brokers is present and the technical tools are sharp with split second updates for traders/brokers/publsihers (real media exchange platform for instance). But still a player with data, tracrecords, sharp technical tools, experience and great knowledge has the edge…
Nai // May 4, 2009 at 1:08 pm |
“In a balanced market, the financial services cost per click (CPC) should be 100x the cost per thousand impressions (CPM) i.e. 200€”
I was wonderinf how did you arrive at this figure? Also, the arbitrage that you speak of has been going on for a few years now. Try searching for MFA (Made for Adsense) sites and you can see a lot of documentation leading back to 2006. My understanding of such arb is that it’s getting harder and harder to execute such a biz model due to Google’s QS affecting affiliate/low content sites.
philiphallenborg // May 5, 2009 at 10:54 am |
I arrived at a number by using a simple clickthrough rate of 1% based on a CPM cost for Scandinavian markets. Of course these will vary – and you are right it is not written in stone.
I know of a couple of outfits that have attempted to do this – you are absolutely right. My own company discussed it already in 2004. I guess from my point of view question is whether volumes and demand in the market place (ever increasing supply of impressions) would allow for a more robust business model – maybe even mimicing a stock market trading system where site owners would be “stocks” and CPC, CPM and CPA simple currencies in which stocks would be denominated. I know of no company that successfully has packaged derivates e.g. a forward of impressions etc.
Nai // May 5, 2009 at 1:23 pm |
Well I guess the part I don’t understand is how CPC is 100x CPM?
Sorry but I don’t quite understand your financial reference. From my understanding of the markets, the more standardized a product is, the easier it is to package and sell. Many a ‘stock’ denominated in different currencies sounds almost like a bespoke product that could be traded over the counter? But interesting idea on being able to ‘lock in’ impression rates and costs.
Gab Goldenberg // June 30, 2010 at 11:02 pm |
While I screwed up the math, I had the same idea a little while back: http://www.seomoz.org/ugc/mikkel-demib-svendsen-interview-on-ppc-and-gab-goldenberg-shpiel-on-ppc-to-cpm-arbitrage
What I’ve seen in practice is that you need CPMs to be extraordinarily high and CPCs ridiculously low to pull this off. And it seems that for this to be possible, you’d have to dilute the demographics advertisers are sold on when you buy the cheap traffic. So long term the CPM would drop (assuming honest ad sales teams and intelligent, optimizing advertisers), and the long term revenue would suffer.