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 Magazine the markets lack of volatility might be the most pressing issue of the coming year.
I think the biggest trend last year was the market itself, he said. Over the past two years, weve 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 firms remaining dollars are dedicated to fixed income. Carons 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 todays 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 havent changed in general over the past few years, but [what has changed more is] how and when they use the tools, he said.
His team trades with an order management system from Charles River Development; for their execution management system, they rely on Triton and Bloomberg EMSX. According to Caron, Loomis Sayles products are large-cap growth in value, mid-cap growth in value and small-cap growth in value. And its pretty evenly divided amongst the caps, he added.
New Role/Philosophy
This is Carons first gig as a head trader. In the past, the 20-year trading veteran served as an equity and equity options quant trader at Grantham, Mayo, Van Otterloo & Co., also based in Boston. Before that, he was vice president of institutional sales at Kellogg Partners and a senior equity trader at Putnam Investments for 15 years. With all this experience, his trading philosophy is straightforward.
In general, the responsibility lies on the trading desk for the traders to know the portfolios they trade for inside and out. We as traders need to know and understand the stock-picking methods of the groups we support, he said. This is only going to help us add value in delivering timely and useful information to the portfolio managers and analysts.
Caron and his team do not shy away from using dark pools and algorithmic trading formulas even as regulators and lawmakers consider the future of unlit trading venues. The equity traders at Loomis Sayles access dark pools via their 12 algo suites provided by the firms broker-dealers. Caron added that they also deal with traditional cash and program trading desks.
How does he pick the right dark pool? With each individual trade, whether its a single aim or a program, we like to look at the urgency of the trade and whats the portfolio manager trying to accomplish. Once we know those factors, we can put together a game plan on how we want to trade the stock, whether we want to access a stand-alone dark pool, to use algorithms, and whether we want to engage a high-touch cash sales trader.
He added, It really depends on what the point, the purpose and the urgency of the trade are.
Caron recalled seeing a big ramp-up in the use of dark pools last decade, when the buyside took trading more into its own hands. That said, he added that the balance between electronic dark pool and cash trading for us has been pretty consistent over the last few years.
Loomis Sayles doesnt have a basement full of Russian mathematicians who write their own algorithms. Instead, the traders use the algo suites provided by 12 sellside firms. The traders also have the ability to customize the formulas, but only do so in particular circumstances, Caron said.
In terms of the buysides evolving relationship with brokers and their consolidation of services, Caron has a front-row seat. He confirmed witnessing the consolidation of broker desks over the past few years and noted that the combination of high-touch and low-touch is the latest move. From my perspective, its up to the buyside desk to dictate what they need, and if one point of contact at the broker fits what you need, then so be it, he said. He added that buyside traders must remain cautious that the lines between high-touch and low-touch business-which have always been walled off from one another-do not blur. Buyside traders must be able to remain anonymous when necessary in the trade cycle.
That said, if a broker can show me how their new combination of low- and high-touch trading will benefit my desk and my portfolio managers, Ill be the first to listen, he told Traders Magazine.
Rating brokers is no game inside Loomis Sayles. According to Caron, portfolio managers and analysts vote on the brokerage/research houses that help out the most on a daily, weekly, monthly and quarterly basis. On the trading desk, they have roughly 40 trading counterparts, and client commission arrangements (CCAs) set up with a handful of firms. If we are going to add a broker dealer to our approved trading list, they need to exhibit some types of advantage over brokers we already trade with. If they dont meet that requirement and have received votes from our PMs and analysts, they would potentially be paid through a CCA, he said. My traders only have to concern themselves with what broker to execute with, as all the research payments and CCA allocations get done behind the scenes, which helps to eliminate any conflict of interest.
Inside Loomis Sayles
Headquartered in downtown Boston, Loomis Sayles was founded in 1926, a mere three years before the Crash of 1929 and the start of the Great Depression. It is now a subsidiary of Natixis Global Asset Management. The mutual fund and institutional investment firm made a number of recent hires along with bringing Caron on board in July. Last April, Eileen Riley and Lee Rosenbaum were named co-portfolio managers of the Loomis Sayles Global Equity Opportunities investment strategy. In September, Peter Marber signed on as head of emerging markets investments with a mandate to focus on fixed income and equity investing. David Waldman, director of the firms quantitative research risk analysis group, was also named deputy chief investment officer in May. The head of all trading inside the firm is Chip Bankes, who primarily oversees bond trading. Caron says Bankes and he oversee the day-to-day operations for equities, adding that three directors inside the firm oversee subsets of the fixed-income desk as well.
In a recent article posted on the firms website, a Loomis Sayles equity trader described a day in the life of a trader inside the firm. Vice president and equity trader Timothy Zimmer wrote: On a weekly basis, portfolio managers and analysts hold a conference call to discuss names they are considering for the portfolio. Immediately afterward, I compare these with commentary from brokers on the same stocks. Is their perception of the stock materially different from ours? As value investors, we like to buy stocks when frustration is at its peak, which often means the pricing is lower.
Zimmers day-in-the-life article said Loomis Sayles traders are divided into four groups: value, growth, core equity and global. According to Caron, the traders responsibilities have changed over the past few years. In the coming year, for example, the equity desk will move to a sector-based layout for U.S. trading, with each trader responsible for either one or two sectors depending on expected activity and trade flow. Loomis Sayles officials believe this will better streamline the information coming in from its street contacts, who have been sector-based historically. This restructuring will allow the traders to better focus on one or two areas instead of having a generalist bent.
The sector roles for the traders will also allow them to better understand what information to deliver to our PMs and analysts. For non-U.S. trading, our traders will continue to focus on specific regions instead of sectors, Caron said.
So far, Caron and his team are optimistic about growing equity AUM in the coming year. We have seen our a number of our equity products gain traction (last) year as our overall performance has been strong. Specifically, we are seeing inflows in our large-cap growth and global equity strategies, he said.
The State of the Markets
Another challenge for Caron and his team is market structure and how trading technology has struggled to adapt to the new landscape. The market structure in place today is a result of the fragmentation that exploded over the past decade, he said. Caron is heartened that since the 2010 flash crash, a number of new regulatory changes have been implemented or are waiting to be rolled out. He cited limit up/limit down and marketwide circuit as measures that give the market a sense of security despite the increasing number of outages across the exchanges over recent months.
Unfortunately, all these issues introduce uncertainty on the desk. We can prepare as much as we want for economic announcements or earnings releases, but you really cant prepare for a trading glitch, Caron said. I think we need more clarity from the exchanges on what theyre going to do to prevent these outages.
When asked what tops his trading technology wish list-the one piece of new IT that could help his trading day-Caron points to a way to manage the unending flood of data. These days were pretty well connected with the markets whether were in the office or at home, with the ability to log into the systems or to check Bloomberg quotes or what-have-you when were on the go. I think making that a more concise delivery would be helpful, he mused.
His Quant Past
Asked to describe his tenure at Grantham, Mayo, Van Otterloo & Co., Caron looked further back to his 15 years at Putnam Investments, where he spent the majority of his time as a health-care sector trader working for the fundamental portfolio managers. GMO was a great experience, as I hadnt been exposed to the quantitative approaches such as the ones they employed. The experience forced me to look at trading in a different way and gain a knowledge of things that hadnt taken up much of my time in my previous roles. I started to pay much closer attention to market structure, and had to become much more of an expert in the low-touch arena, as the majority of the flow was executed in that fashion, he said.
Caron was a merger arb trader and options trader at Grantham Mayo in early 2010, when the firm hired a portfolio manager to oversee all merger arbitrage and special situations. Part of Carons role was to serve as his primary trader. He describes this as one of the best learning experiences of his career.
We employed the traditional long/short strategies, as well as actively traded equity options where appropriate, Caron said. I also traded for our equity options strategy at the firm. This also was a good learning experience, as we traded options strategies on a global basis, so I not only learned about options in general, but more importantly how the trading of the instruments differed depending on what region you were transacting in.
Caron is certainly busy these days. As the married father of three children-twin 9-year-olds and an 11-year-old- he spends most of his weekends ferrying his kids to and from various sports practices and games. So youre in the middle of these chauffeur-chaos years? Traders Magazine asked. Exactly, Caron replied, adding, All good, though.
