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Feb 12, 2013 ||
The term “tipping point” is a medical one and is the moment in an epidemic when a virus reaches critical mass and contagion sets in. In his book of the same name, New Yorker staff writer Malcolm Gladwell applied the term to business and social networks, described the point where a minor change turns into a major and irreversible one, and ideas and products spread as viruses do. Graphically the line moves from being fairly flat and accelerates upwards. This curve is found in the trading history of many successful goods and services, and its shape is fascinatingly similar in different markets.
Let’s look at three similar examples of success: the growth of sales of Apple’s iPod, the rise in trading volumes of CME’s FX futures contracts and the explosive growth of goals scored by Tottenham Hotspur F.C. star Gareth Bale. What caused the tip in each?
The growth of sales of the iPod was slow from 2002 but accelerated in 2005 and continued to grow apace. Something caused this acceleration. Clearly the product was very well regarded. It was a “must have” to many and Apple’s expansive marketing efforts worked. But it is almost impossible to determine just which small event made the product sales accelerate so fast.
The growth in volume of CME FX Futures trading follows a similar pattern to that of the iPod. Volumes in this suite of futures contracts were increasing gradually as the growth in electronic trading took off beginning in late 2002. In 2007, FX options were then listed electronically side-by side with our floor trading and more ‘buy-side’ or asset managers began to enter the market, which provided another surge. The third period of growth followed the push by many to central clearing in 2009-13. Though it is often difficult to determine the catalyst for change, we can identify the tipping point here. A shift in market structure (electronic access to our markets) occurred which opened the FX markets to a whole new client base, driving new participation in FX futures and options across the board. The following chart illustrates this:
Gareth Bale is a young prolific Welsh footballer who shouldered great expectations. His early performances were good but his goal scoring was ordinary. Then one evening in May 2010 he scored three goals in an away match in Milan against one of the world’s best teams and has not stopped scoring since. What triggered this, what small change caused this is a mystery.
Gladwell’s view is that a few key people, with specific skill sets or attributes, are responsible for the minor changes that trigger the tipping point. He calls them connectors, mavens and salesmen.
Connectors typically know many people and are skilled at making friends and acquaintances; to them it is easy. They have a network in the relevant business or social community and are happy to make introductions. Connectors may not know products, but they know people, and typically know over 100 people. They are characterized as curious, sociable and enthusiastic. And the more connections that are made the more likely the product will approach and pass the tipping point.
Mavens are specialists. They hold valuable, often new information, have a thirst for knowledge as they gather data and are helpful to others with a lower information set. They share and trade information as if brokers.
Salesmen are the persuaders who close the deal. Personable, successful salespeople often find clients want to agree with them.
All three types of people are needed to develop a success story. It is like a factory production line. Connectors connect the relevant people, the mavens inform and the salesman close the deal. But it is the few that matter, that make the difference and cause the tip.
Gladwell states in The Tipping Point:
“Economists often talk about the 80/20 Principle, which is the idea that in any situation roughly 80 percent of the “work” will be done by 20 percent of the participants. In most societies, 20 percent of criminals commit 80 percent of crimes. Twenty percent of motorists cause 80 percent of all accidents. Twenty percent of beer drinkers drink 80 percent of all beer. When it comes to epidemics, though, this disproportionality becomes even more extreme: a tiny percentage of people do the majority of the work.”
He illustrated this graphically.
Gladwell sees this pattern everywhere. If he is right, then as CME Group becomes the global provider of choice for exchange-traded and over-the-counter FX risk management and it can point its success to the number of connectors, interacting with mavens and sales people who have passed on the message about this international marketplace.
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Daniel Corrigan is an adviser and consultant to CME Group based in London.
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