I am excited to announce the first official gesture in the financial securitization of Attention:
The Chicago Board of Trade, which was established in 1848, has invested in ROOT. Bernard Dan, the CEO of the CBOT is joining the ROOT board:
"More than 30 years ago, the CBOT was the first exchange to trade interest rate futures contracts. Our partnership with ROOT represents an opportunity to be at the forefront of Internet lead futures trading, and we look forward to working with ROOT as this industry continues to evolve.” For the full press release click here
ROOT builds upon the thesis of Majestic Research, which was based on a new consumer data-driven research model. After coming up with the idea, I met Tony Berkman who had been building complex quantitative models for large hedge funds and funds of funds. Together we founded the company which continues today as the only independent voice of quantitative reason in the investment community. The irony of today's announcement begins with the fact that Doug Atkin the CEO of Majestic was formerly the CEO of Instinet which helped usher in a generation of institutional electronic trading. In December 2004, I helped organize a conference for Majestic called "Does Online Shopping = Paid Search?". The implicit thesis was that Internet Advertising was starting to look more like Wall Street than Madison Avenue. It triggered the first of many blog posts about Attention, called "Attention Markets":
"Keywords have no inherent value, but they do typify how both Madison Avenue and Wall Street are valuing the Internet economy circa 2003 (in the same way that impressions and page views signified such in 1998). Soon, keywords will become replaced by leads (or some derivation) and there will be a new group of old and new companies competing for the spoils."
This investigation led in the Spring of 2005 to the first Media Futures series and specifically the section on Arbitrage:
"But on the other side of the mirror, we are being watched. Our queries are being mapped legitimately by companies looking to contact us. If you are not careful, an errant click will be answered with a telephone call from a sales representative. And so as we succumb to these performance-based networks, our future purchases, our future media consumption, our lifetime economic value across hundreds of categories and thousands of companies, are all being calculated in real-time. Not by a single agent, but by multiple agents each trying to evaluate our momentary state of purchase intent in the context of the many monetization levers these advertisers have at their disposal."
Soon thereafter ROOT was born, originally with the fitting moniker IAG- the Internet Arbitrage Group. My idea (developed in conjunction with the beautiful mind of Josh Reich) was that insofar as a company such as a mortgage lender was willing to take delivery of a lead, without controlling where it came from, then such a lead was a commodity. And insofar as this lead commodity was just personal information along with an intent to enter into a transaction, well then it could be bundled with other leads and securitized in order to price it. Looking for solid examples in history for this, I turned to my friend and advisor Andrew Bein who said this reminded him of the Mortgage Backed Security Market.
I did some research and all roads pointed to Lewis Ranieri, the former Vice Chairman of Salomon Brothers and recognized inventor of financial securitization. I located the following paragraph from Business Week and included it my appendix to the executive summary for IAG:
Business Week, November 29, 2004
Lewis S. Ranieri: Your Mortgage Was His Bond
The bond trader turned home loans into tradable securities
The past quarter-century has seen a revolution in finance. It's felt every time a homeowner refinances a mortgage or signs up for a credit card. No one person can claim to have lit the fuse for this revolution-- but Lewis S. Ranieri was holding the match. Joining Salomon Brothers' new mortgage-trading desk in the late 1970s, the college dropout became the father of "securitization," a word he coined for converting home loans into bonds that could be sold anywhere in the world. What Ranieri calls "the alchemy" lifted financial constraints on the American dream, created a template for cutting costs on everything from credit cards to Third World debt -- and launched a multibillion-dollar industry.
As many know by now, I subsequently met Lew in person and brought him on to join me as Chairman and lead minority investor in what is now ROOT. The vision continued to evolve and clarify and I built a strong team of people to develop the concept for a true financial marketplace for Internet leads. In October of last year I described it here on this blog for the first time:
Wall Street Meets Madison Avenue
What is a lead?
A lead is generated when a consumer clicks on an ad and is directed to a landing page—a web site that collects information critical to determining how valuable a potential customer is—and fills out a form. This form includes both contact and intention information about the consumer. This lead is then sold to an advertiser, who contacts the consumer to close the sale.
What is an exchange?
An exchange provides a context for giving and receiving. It is a simple concept that solves hard problems, frequently in financial contexts: stocks, bonds, commodities, currencies, etc. In these markets, exchanges provide price data and quality information about the underlying commodity. Successful exchanges work hard to stay out of the way of market participants. This means encouraging liquidity without providing any: jujitsu not sumo. With access to this data, traders with many different agendas can meet on the same, level playing field and compete.
Today in Business Week, Rob Hof reports on the full realization of this vision and how the CBOT has become the first Wall Street exchange to recognize one of the last great frontiers of unregulated arbitrage, namely the buying and selling of Attention on Madison Avenue.
ROOT was inspired by a series of blog posts and in less than two years established an entirely new financial security. For the group of us who huddled together in a small office off of Brad's trading floor, this is the validation of our dreams. The merciless capitalism of Wall Street has moved uptown to take over the shopping windows of Madison Avenue. Advertising will never be the same.
Now it is time for Attention to take control...