The ability to Arbitrage exists because there are market inefficiencies.
Two leaders of the digital industry (both from WPP) weighed in on their transparency, their model of making money and their views --- both centered on arbitrage, and evolving business models inside of holding companies (trading desks).
Arbitrage is needed, and often times welcomed, in most places around the world in order to keep markets balanced, advance certain technology that exploits spreads (supply vs demand), and allow for people to help balance an imbalance in the market.
But, you know where it does not work?
Arbitrage does not work when you cannot disclose who you are "ARB'ing" for. Who exactly are you MAXIMIZING THE OPPORTUNITY FOR?
Who do you maximize the profit, the spread, or the market inefficiency for? It's an important, yet easily evaded point.
Yourself? Your clients? Your largest clients? Your bottom line?
Do you have a target margin that you aim for when ARB'ing?
Transparency has multiple masters, and the first one is honesty.
So, I ask the following simple questions to the leaders of WPP.
1) Regarding your trading desk(s) -- who do you optimize for and in what order, your profit margin, or your client's best interest?
2) Do you share knowledge across clients (critical intelligence and learnings) and if so, do the largest spenders (biggest clients) pay for the learnings, so that smaller clients benefit?
3) What is the range of margin that you seek to exploit in the arbitrage world? In the media landscape (pre trading desks) target margins that agencies published and were transparent about ranged from 15% to 25%. Can you provide guidelines or a range on your arbitrage model regarding trading desks?
4) Should publishers be more knowledgable about the practices of ARB'ing that trading desks have been executing on, and do you think that you as a trading desk have been fully transparent with them about your business model and practice?
5) Do you think that trading desks are just glorified and evolved ad networks, with the advertisers being the holding companies clients? Did you not just reduce the networks revenue (Ad.com, Valueclick, Tribal Fusion, Collective, Specific, CPX, Undertone) and move that spending to your "self-interest" trading desks?
I love ARBing. I really do. I just do not like it when people do it without disclosure.
It hurts our industry, and it lends to questions about motives.
I've raised these points and asked these questions for many years.
Still waiting for answers, but not holding my breath.
Blue is not my favorite color.