Pattern Recognition, by Ian Sigalow


Dark Pools Come To Madison Avenue

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Dark Pools Come To Madison Avenue


This piece was originally published on Business Insider.

Dark pools on Wall Street were once heralded as a way for clients to get better deals on stock trades, but now they are associated with fraud and market manipulation.

In the latest dark pool scandal, Barclay’s was accused by the New York Attorney General of misleading investors by funneling trades into Barclay’s dark pool without prior consent.  Barclays lost over $5 billion in equity value just moments after the news was released.

For those who aren’t familiar, “dark pools” are essentially private stock exchanges. The theory is that a bank can match buyers and sellers from its own trading book, resulting in lower fees and benefiting both parties. There is also an argument that trading in stealth helps clients get a better price.

Both of these theories have largely been debunked. Exchanges are a prime example of a natural monopoly, where buyers and sellers get better pricing and trade execution as exchanges get bigger, not smaller. Dark pools have persisted, however, because they are huge money makers for Wall Street banks. They essentially allow the bank to trade against their own clients in secret, and not surprisingly they are now a source of ignominy.

Unfortunately it looks like Madison Avenue is following in the same footsteps.

Last week WPP announced that they are going to create the first “dark pool” in adtech. Rather than buy media on a public exchange, WPP plans to create a private exchange. The storyline sounds like a chapter from Goldman Sachs in 2001: “If you trade on our private exchange, you save on fees and get better pricing on media.” Unfortunately this ignores the logic around how marketplaces actually work.

In the interest of full disclosure, Greycroft has significant adtech investments that may be affected by this trend, but I am sure the announcement has other people scratching their heads as well. One obvious question is why would a publisher voluntarily move from Google’s exchange, where they get paid a lot of money, to WPP’s exchange, where they are promised less money?

In all likelihood, there are deals going on behind the scenes. In the past, tech companies have used guaranteed spend to move publishers onto new platforms, allowing a publisher to make at least as much money as they did before. Our adtech companies do this off their balance sheet and assume the risk if it doesn’t pan out. This would be the first time, however, that an agency would use client dollars to accomplish the same feat.‎

‎If you are curious about how this benefits clients, so am I. The one thing that is very clear to me, however, is how it could benefit a media agency that is on both sides of the transaction.‎

Therefore, buyers beware! Free and open buying and selling of advertising works best in a free and open market, not one where the owner is trading on the same system. Remember that you heard it here first, while there is still time to resist the power grab.


Ian Sigalow

Ian is a co-founder and partner at Greycroft Partners in New York City. He has been a venture capitalist since 2001.

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