Is The Ad Marketplace Vulnerable To Flash Crashes?

marktorrance“Data Driven Thinking” is written by members of the media community and contains fresh ideas on the digital revolution in media.

Today’s column is written by Mark Torrance, Chief Technology Officer of Rocket Fuel Inc.

In May 2010, the Dow plunged more than 900 points when algorithms began a high-speed selling spree — based on news related to the Greek monetary crisis — before anyone noticed. Then this April, the Dow fell nearly 150 points after a hacker falsely tweeted, using the Associated Press’ Twitter account, that the White House had been attacked. Fortunately, in both cases, the market recovered within minutes.

In spite of the safeguards that have been put into place since those two flash crashes, the financial market remains vulnerable to huge losses. Flash crashes can occur when reports or tweets — whether true or false — are picked up by software that monitors the news and uses that information to take action within a high-frequency trading environment.

That has raised the question, for some, of whether programmatic-buying systems — based on similar algorithms — could experience the same sorts of crashes. After all, the best programmatic-buying systems make billions of buying decisions per day. Does programmatic buying put advertisers’ money at risk? Should advertisers worry about algorithms falling into an ad-buying frenzy? Probably not. I’d argue that programmatic-buying systems are far less likely to suffer the financial market’s dramatic losses in flash crashes, for four good reasons.

  1. The commodities traded in the ad marketplace are relatively inexpensive, compared with stocks. The biggest mistake you can make on a single transaction would amount to much less than a dollar. You can spend, at most, maybe 10 cents on an extremely high-priced impression. In other words, you just can’t blow a lot of money buying a single ad impression.
  2. The commodities are short-lived and exist in microseconds; it’s not as if you can get “stuck holding a stock” while its value crashes. Ad impressions are ephemeral assets, with each impression worth no more than a few cents, and then they go away. Any kind of a problem along the lines of a flash crash would have to affect the decision-making about buying not just one ad impression, but a whole lot of them over a long period of time.
  3. “Fallbacks,” in which the value of the commodities falls to zero for a period of time, are rare on the stock market. But they’re commonplace in online advertising, where there is a well-accepted mechanism for filling the unsold-inventory void with low-cost fallback campaigns or public-service announcements.
  4. The best programmatic-buying systems have safeguards built in. You can help ensure your ad buying is safe by checking to make sure your provider has extensive protections in place to prevent sudden price spikes.

For these four reasons, the risk of a flash crash in this the ad marketplace is very, very low.

Follow RocketFuel (@RocketFuelInc) and AdExchanger (@adexchanger) on Twitter. 

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  1. Mark – kudos to tackling a really interesting topic. While I thought a lot about high frequency trading and flash crashes, I never really thought about them in regards to trading media thru programmatic means. The points that you make around media being relatively cheap, <$1 is interesting, but is it accurate from the respect not of price, but about the volume? Meaning, while I could clear sub $1 media, I'm not just buying 1CPM, but rather hundreds of thousands, if not millions or billions. While the individual CPM is cheap, when aggregated up to what I'd actually be purchasing, is really expensive (potentially). I also think that the half-life of the impression is so short that there is significant risk here because the impression basically goes "poof" and it's gone. So I could have bought $50k worth of media and served it in real-time… and it's gone in a Flash Crash. In a financial world, I might have bought $50k worth of DGIT but I still am a holder of it…. I can liquidate it for a loss (hopefully not) or a gain, depending on if the stock was correlated or not to the crash.

  2. You’re right that the high volume of impressions means that an erroneous setup, if left unchecked for a few minutes or hours, can potentially cause a lot of wasted spend. I don’t think this is really like a Flash Crash, though, because the value of the media you bought was not ever 0, and was not under the control of an external party as with stocks or hard assets. My argument basically amounts to “you can’t be left holding the bag” as in the Stock Market because the “bag” is so inexpensive and fleeting.

    So as long as you have controls in place on the spend: maximum CPM bid, and maximum dollar or impression budget per day or hour, you will have gotten some value (even in branding, if not in clicks or conversions) from the act of buying + showing those impressions.

    I agree that those controls are tricky and important to get right, but they are under the control of the buyer, which is better than being at the whim of the market.