The current period of low volatility is being driven primarily by the highly accommodative monetary policies adopted by the Federal Reserve and the world’s other central banks, Paul Jiganti, managing director at TD Ameritrade, told Markets Media.

“It’s a function of easy money,” he said. “The greater the liquidity, the lower the volatility, for the most part, outside of some exterior shocks that will move the market. As long as liquidity is as cheap as it is, or money is as cheap as it is, liquidity will be high and volatility will stay low.”

Jiganti, who will be speaking at Markets Media’s Chicago Trading & Investing Summit on Sept. 23, is responsible for maintaining relationships with the exchanges, working with regulators and leading TD Ameritrade’s strategy on market structure and exchange issues for retail clients.

Jiganti began his career as a market maker on the floor of the Chicago Board Options Exchange where he spent six years. He then joined Susquehanna and over the next 16 years traded in all CBOE products, as well as the financials at the Chicago Board of Trade.

“My background is purely trading,” he said. “Everyone tries to guess the next external event that could change the landscape, but those are proving to be short-lived.”

The free flow of information contributed to keeping volatility low. “The information gets out so quickly on any type of event, that there’s very little that shocks the market,” Jiganti said. “The Fed guidance on forecasts is so far into the future there is very little that’s shocking the market from a monetary policy standpoint.”

Statistically, while the chances of volatility popping in the near term are low, it remains sensitive to any perturbations at either end of the distribution, the so-called fat-tailed distribution. “It is probably a real tail risk game now,” said Jiganti. “The likelihood of moves beyond 5% or so of the current spot is probably low, but I bet the tails are real fat compared to historic levels.”

The interesting trade with volatility in the current environment is the “correlation trade” between index products and the individual equities. “Watching the correlation drop because volatility is so low signals that it’s an interesting time for that trade, in which you sell off the index products and buy individual components,” said Jiganti. “That’s the anti-volatility bet that you can make greater returns than by just selling the VIX or buying the VIX.”

Featured image via gitanna/Dollar Photo Club