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Rocket Fuel's High Frequency Marketing Business Is No Sure Bet

NEW YORK (TheStreet) -- There's been much written in recent months about the phenomenon of high frequency trading -- the trading of financial products on electronic exchanges at millisecond speeds.

But there's another even more active electronic exchange that most consumers participate in daily -- digital advertising.

On almost every Web page you browse, a flurry of banners and videos tell you about something you might want to buy or use. Sometimes the ads seem eerily personal. When you visit the Web site, you'll see a different ad than will your next-door neighbor visiting the same Web site at the same moment. So who decides that you should see an ad for an iPad, and your neighbor should see one for a local shoe store?

Behind those decisions is a vast army of computer algorithms all over the world competing on elaborate electronic exchanges for the opportunity to catch your attention. This system dwarfs Nasdaq by transaction volume and frequency, and the ecosystem of players competing on millisecond time scales for a piece of the pie rivals the financial markets in complexity.

Must Read: Groupon Plunges: What Wall Street's Saying

The first set of players is the inventory owners like Facebook (FB) or TheStreet (TST). These are the web spaces that generate large amounts of traffic and look to sell advertising space. They are the Internet equivalents of busy street corners and popular TV channels.

The next level is the ad exchange -- a technology platform that connects inventory owners and buyers. Two of the more popular exchanges are Right Media, owned by Yahoo! (YHOO), and DoubleClick, owned by Google (GOOGL). These platform facilitate advertising transactions in much the same way that Nasdaq facilitates equity transactions.

Participating in an ad exchange is a high-stakes matter that requires a fair amount of sophistication, and many companies and ad agencies choose to hire third parties to buy ad impressions on their behalf. These firms' edge is in proprietary algorithms that buy optimally targeted impressions for the lowest price possible, much like HFT firms try to scalp pennies off stock prices. This next level of high tech ad bidders is the one we'll focus on here.

Let's use Rocket Fuel (FUEL - Get Report) as an example.

Rocket Fuel, which trades around $18 and is down 71% for the year to date, says it has developed an artificial intelligence-driven optimization engine that leverages big data to make ad decisions based on consumer online activity, market events, bid history, brand interactions, and first-party data. It uses this platform to programmatically buy ad inventory on behalf of customers, and it derives most of its revenue from this middle-man activity.

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