THE DAYS OF suit-clad men shouting out orders on the bustling floors of stock exchanges are mostly gone, replaced by windowless rooms full of servers, but the stock market is still a busy place. On the 13 US stock exchanges combined, around 50 million trades happen every day. And yet there’s another digital marketplace out there that processes tens of billions of transactions daily, one whose complexity makes the NASDAQ look like a lemonade stand: online advertising.
It may sound odd to refer to advertising as a market, but that’s what it is. The industry’s own terminology provides a hint: Publishers selling ad space, and advertisers buying it, do business on so-called “ad exchanges”; one of the biggest companies involved is called the Trade Desk. Whenever you load a web page, advertisers compete in an automated process called real-time bidding to show you their ad. Multiply that by billions of internet users around the world, loading many different pages and apps per day, and you can start to appreciate the scope. As antitrust scholar Dina Srinivasan puts it in a forthcoming paper, online advertising “is likely the most sophisticated of all electronic trading markets.” And yet, despite the market’s size and complexity—and unlike other markets—online advertising is almost completely unregulated.
A former digital advertising executive, Srinivasan gained attention last year for her paper “The Antitrust Case Against Facebook,” which laid out a novel theory of why Facebook’s market dominance can be bad for users even as it offers a free product. Now she aims to do something similar for Google—specifically, for the sprawling advertising empire that accounts for the vast majority of the company’s revenue. In her new paper, which will be published in the Stanford Technology Law Review, Srinivasan takes a deep dive into the inner workings of the digital ad market. The details are astoundingly complex, but the broad argument is straightforward. When you see an ad online, the odds are very high that the advertiser used Google to buy it, the website used Google to put the space up for sale, and Google’s exchange matched them together. In other words, Google both runs the largest exchange and competes as the biggest buyer and seller on that exchange. On top of that, it also owns YouTube, one of the biggest suppliers of ad inventory, meaning it competes against publishers on its own platform. And yet there are no laws governing any of it.
That regulatory vacuum, Srinivasan argues, has allowed Google to dominate the industry by doing things that are prohibited in other parts of the economy. “In the market for electronically traded equities, we require exchanges to provide traders with fair access to data and speed, we identify and manage intermediary conflicts of interest, and we require trading disclosures to help police the market,” she writes. Her proposal flows naturally from that observation: Apply those regulatory principles to digital advertising.
The resemblance between securities and ad markets first occurred to Srinivasan back in 2014. That’s when Michael Lewis published Flash Boys, which documented the extensive mischief created by high-frequency trading and other modern tricks of the digital securities market—and which helped spur a wave of investigations, fines, and regulatory action. At the time, Srinivasan saw similar issues arising in her own industry.
“When Flash Boys came out, it was comical. That book was being passed from executive to executive,” she said in an interview. “People would laugh about how there were operatives who were arbitraging between ad exchanges too. People were just laughing at the parallels.”
Over the past year, as she researched the paper, Srinivasan realized that the resemblance went even further than she thought, sometimes uncannily so. Lewis describes high-frequency traders seeking an edge by placing their computers as physically close as possible to the stock exchange servers to shave microseconds off trade times. Srinivasan relays a similar anecdote from the world of ad tech: Last year, OpenX, one of the largest non-Google ad tech companies, announced a five-year, $110 million deal to move its exchange to Google Cloud. OpenX was open about the fact that being on Google’s servers would give it a speed edge. “You have to operate at speed, efficiency, closeness to the publisher and the demand side of Google,” one executive said. It’s almost an exact copy of high-speed traders’ tactics. The difference, Srinivasan notes, is that “in financial markets, co-location practices are tightly regulated” to make sure everyone has equal access to speed. In advertising, they aren’t.
Speed is crucial in online advertising because the auctions occur in milliseconds. If an ad buying platform submits its bid too slowly, the exchange might exclude it from the auction entirely. This gives a leg up to a platform that shares infrastructure with the exchange—in other words, to Google. Google advertises this fact. “Since Google Ads and Display & Video 360 run on servers in the same data centers as Ad Exchange, they can respond faster to Ad Exchange bid requests compared to other exchange requests,” says a Google help page. “There are no network latency or timeout issues between either Google Ads or Display & Video 360 and Ad Exchange.” When the buying platform isn’t the same as the exchange, on the other hand, latency issues “can prevent buyers from successfully submitting a bid on up to 25% of bid requests.”
Srinivasan also explores the way Google benefits from unequal access to information. Modern digital advertising is all about being able to target users with the most precision. When someone arrives on a website using Google’s DoubleClick ad server, Google’s exchange “hashes” the ID, passing a different one along to the ad buying platforms. Those buyers then must match their ID with the hashed one to make sure they’re targeting the right person—a process called “cookie syncing.” But cookie syncing, Srinivasan writes, “is inherently inefficient.” Some percent of the time, the platform will fail to match the user. In those situations, she writes, advertisers aren’t willing to pay as much, or anything, because they aren’t guaranteed to reach the right audience.
Google doesn’t have this problem, because it allows its own exchange, and its own ad buying platform, to see the DoubleClick ID. That means it automatically knows who the user is. Google says it shares the DoubleClick ID only with its own platforms to protect user privacy. But another result is to put a thumb on the scale of Google’s own properties: If you want to make sure you’re targeting the right user, you have an extra incentive to buy ads using Google. Google advertises this advantage as well.
While securities law has its share of problems, it does broadly curtail the kind of flagrant information and speed imbalances that Srinivasan describes in the ad market. Indeed, the contrast between the digital advertising regulatory vacuum and the world of financial markets is striking.
“It’s a highly, highly regulated system,” said Kevin Haeberle, a professor at William & Mary Law School who specializes in securities law. Only registered brokers are allowed to execute trades, and those brokers must register with the Securities and Exchange Commission. “You’ve got to take tests, you’ve got to be registered, you have to be supervised in certain ways, you’ve got to pay into various insurance mechanisms to make sure the trades actually do settle.” He added, “There’s this whole regulatory regime, it’s very complex, and it applies to regulating these exchanges that run this important market for our society. In the ad market, we don’t have that.”
Why does that matter? At the broadest level, when one entity is allowed to both run a market and participate in it, and when there are no rules requiring it to let everyone else participate on equal terms, there’s nothing stopping it from enriching itself at the expense of the other buyers and sellers. In digital advertising, that means Google could be inflating prices advertisers pay, or depressing the amount of money publishers receive, or both. Google, of course, denies this characterization. It says its ad tools benefit both advertisers and publishers, no regulation necessary. To Srinivasan, believing that claim would be like trusting J.P.Morgan to run the New York Stock Exchange.
Srinivasan is particularly worried about the publishers who rely on digital advertising for revenue. “From a very big-picture perspective, we are a democracy and we want a healthy and robust economy of news,” Srinivasan said. “We want the news business as a sector in our economy, we want to make sure that it works. And so we should make sure that the market is not rigged for the middleman, so that entrepreneurs are encouraged to enter the business of news.” (In the paper, she discloses that she is “advising and consulting on antitrust matters, including for news publishers whose interests are in conflict with Google’s.”)
Her argument may be catching on. At the tech CEO hearing held by the House antitrust subcommittee in July, Pramila Jayapal, a Democratic congresswoman from Washington state, cited Srinivasan’s paper directly as part of her questioning of Google CEO Sundar Pichai.
“The problem is that Google controls all of these entities,” she said. “So it’s running the marketplace, it’s acting on the buy side, and it’s acting on the sell side at the same time, which is a major conflict of interest. It allows you to set rates very low as a buyer of ad space for newspapers, depriving them of their ad revenue, and then also to sell high to small businesses who are very dependent on advertising on your platform. It sounds a bit like the stock market. Except, unlike the stock market, there’s no regulation on your ad exchange market.”
In an interview after the hearing, Jayapal said she was looking into developing legislation that would address that regulation gap. She suggested that the underlying principles of any regulation would be straightforward. “It seems to me that the simplest thing to do is say, you can’t control the market and engage as a buyer and seller. Those two things have to be separated. And then, if you’re buying and selling, then you’re regulated by insider trading rules.” She added, “I think it’s just an unregulated marketplace that should be relatively easy to do something about.”
