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January 2, 2014

Looking for Volatility

As the director of equity trading for Loomis, Sayles & Co., John Caron is dealing with a market that is strong but perhaps too placid for its own good. Here's how he trades in calm seas as he searches for volatility.

By By Phil Albinus

Phil Albinus

As the new director of equity trading for Loomis, Sayles & Co., John Caron has his work cut out for him. When he joined the Boston asset management firm in July, the markets were settled in a slow and steady climb with little to no volatility. On paper, everything looks good, but something is off. Despite the DOW breaking 16,000 in November, the 44-year-old buyside trader is looking at a seemingly unique market, like nothing anyone has seen in a recent memory: corporations flush with cash yet refusing to hire or start ambitious projects; an unemployment rate stuck around 7 percent at best, skittish investors waiting for better times; and a stock market that yields only 2 percent volatility during typical trading days.

Caron told Traders the market's lack of volatility might be the most pressing issue of the coming year.

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"I think the biggest trend last year was the market itself," he said. "Over the past two years, we've only experienced a handful of days when the market has made a greater than 2 percent move, while in 2011 we had 68 such days."

Asked if trading today is like surfing in a puddle with no momentum, he is quick to agree. "Exactly. I would say the approach of a trader now is probably much different than it was back in 2009 through 2011, when the market was taking bigger swings on a day-to-day basis," Caron said.

In his new role at Loomis Sayles, a Boston institutional investor and mutual fund firm with roughly $197 billion in assets under management, Caron oversees the equities trading desk. Five traders and one junior trader report to him. He oversees $24 billion in equities, and the firm's remaining dollars are dedicated to fixed income. Caron's new job in this new environment-low market swings-has meant adapting his trading practices from the wild and woolly days of market volatility after the credit and liquidity crisis of 2008.

Caron points to the data on the lack of volatility. He noted that the VIX-the Chicago Board Options Exchange Market Volatility Index, which aims to measure the volatility of S&P 500 index options-hit the mid-40s in 2011, while the past 18 months have seen it trade in a range of 13 to 17, with a few spikes in the low 20s. "There was much greater urgency to finish orders by the end of the day during the 2008-2011 stretch, as traders wanted to protect themselves against overnight gap risk," he said. "That environment changed the way traders sourced liquidity."

This means his traders must fine-tune their practices. "In today's market, my traders are allowed to be somewhat more patient in their execution strategy, which of course will be dependent on the urgency of the trade idea itself. The tools my traders utilize haven't changed in general over the past few years, but [what has changed more is] how and when they use the tools," he said.