The “barbell analogy” is traditionally used to describe investment strategies where half a portfolio is anchored in defensive, low-risk assets and the other half is focused on much more aggressive positions, with nothing in between. In a period of industry consolidation or disruption, it is also used to suggest a hollowing out of the centre ground, where a market becomes increasingly dominated by a handful of major players on one side and a larger number of small niche firms on the other, with very few mid-tier providers in between. Can technology help even things out in financial markets?
It’s seductively easy to think of examples in the financial markets sector that fit the barbell narrative. Particularly when the costs of regulatory compliance or investment in the latest technologies are widely regarded as the price of maintaining a seat at the top table for a particular line of business.
Despite the much-discussed disruption of the finance industry by post-crisis regulation, Fintech and unprecedented macro-economic conditions, we might be hearing less about the barbell analogy in the next few years. This is largely because technology innovation is making it easier for banks to respond to emerging market opportunities quickly and cost-effectively, in both voice and electronically-traded markets.
Bundled service packages
Banks can increasingly deploy bundled service packages that draw from a variety of software, networking and computing resources – some accessed from third parties via the cloud – to provide them the trading infrastructure they need. This allows banks to focus on their core competencies and win new business, leveraging their existing in-house skills and resources.
However, buying such services ‘on demand’ does not mean settling for the second-best. Take for example the high-tech, low-latency realm of FX market-making. Banks looking to broaden their FX business – whether niche players, mid-tier or global tier ones - can now combine best-in-class latency from high-capacity networks with managed trading solutions from leading technology vendors. These are all supported by experienced financial services specialists.
What’s in the bundle?
Such a package might include the lowest latency connectivity between trading centres and Optical Transport Networking technology. This enables the rapid transmission and analysis of large complex data sets, supporting informed trading decisions. On top of this may sit a range of managed hosting services and platforms to facilitate fast, reliable connectivity and exchange of market data with exchanges and broking counterparts, using managed cloud and data colocation services (the latter enable users to meet regulatory and data sovereignty requirements without having to invest significant resources in multiple jurisdictions). In addition, an intelligent IP-based voice trading platform can be included to increase productivity and flexibility.
End of the barbell?
Tailored packages such as these enable firms to grow their financial markets franchises – whether in FX or any other asset class - quickly and cost-effectively. This is made possible when trading infrastructure set-up costs are shifted from capital to operating expenditure, timelines for implementation are significantly shortened and day-to-day management is outsourced to a trusted, expert service provider.
At a time when business models in banking and finance sector are being disrupted, there is little doubt that managed service packages such as those aforementioned can help banks adapt quickly, both in responding to threats and capitalising on opportunities. Going back to the barbell analogy, this suggests the future is likely to be much more fluid and changeable, with room for players of all sizes to thrive, whether incumbents, disruptors, or both.