January Market Fact Book

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1 January Market Fact Book Weeden & Co. Weeden Program Trading Group January, 2014 Highlights from our January Market Fact Book Though many on the Street want to hit the panic button after what was one of the worst months for the market in the past four years, a deeper diagnosis of the state of the industry shows that things are not as bleak as some would have you believe. We elaborate on our opinions in the first two pages of this month s Fact Book by looking at Factor Performance, Market on Close Imbalances, and Equity Fund Flows. With our first full month of odd lot reporting behind us, we added a new chart to this month s Fact Book that shows the average trade size at each major US venue. This otherwise innocuous look at equity market structure revealed a pretty interesting trend: the three venues in the US with the smallest average trade size are all inverted destinations. We round out our January Fact Book with a calendar of the eight major upcoming index events including their expected announcement and effective dates. Read about what s to come in this space as well as what is new on the Market Structure front in this edition of our Market Fact Book Disclosure: This publication is prepared by Weeden & Co.'s trading department, and not its research department. This publication is for information purposes only and is based on information and data from sources considered to be reliable, but it is not guaranteed as to accuracy and does not purport to be complete and are subject to change without notice. This publication is neither intended nor should be considered as an offer or the solicitation of an offer to sell or buy any security or other financial product. Nothing contained herein is intended to be, nor shall it be construed as, investment advice. Information contained herein provides insufficient information upon which to base an investment decision. Any comments or statements made herein do not necessarily reflect those of Weeden & Co. LP or its aff

12/31/2013 1/2/2014 1/4/2014 1/6/2014 1/8/2014 1/10/2014 1/12/2014 1/14/2014 1/16/2014 1/18/2014 1/20/2014 1/22/2014 1/24/2014 1/26/2014 1/28/2014 1/30/2014 2 Was January As Bad As It Seemed?

2 12/31/2013 1/2/2014 1/4/2014 1/6/2014 1/8/2014 1/10/2014 1/12/2014 1/14/2014 1/16/2014 1/18/2014 1/20/2014 1/22/2014 1/24/2014 1/26/2014 1/28/2014 1/30/ Was January As Bad As It Seemed? When it comes to the stability of Global Equity Markets, the jury is still out on whether what we saw in January was something to worry about, or just a blip on the radar. Despite most major indexes being down more than any month since August 2012, the key signals we use to gauge risk appetite were mixed at best. For almost every measure, value lagged growth for the majority of January, even during the later portion of the month when the S&P fell 3.4%. Specifically, we saw large cap underperform small cap most of the month, with the spread only contracting in the last week or so. 1% 0% -1% -1% -2% -2% -3% Large Cap Lagged Small Cap for Almost all of January SPY - IWM (%) We drilled in on that accelerated sell off in the latter half of the month with our S&P 500 Factor Decile Analysis, thinking that we would see blatant risk-off trends across major factors like P/E, Volatility, and Short Interest. Instead, we found that the 50 highest P/E stocks in the S&P 500 were the single best performing group from Jan. 22 nd to the end of the month. Weakness in major value names made the 50 lowest P/E stocks the worst performing group in the index, while neither our Short Interest nor Volatility breakdown revealed anything alarming. -1.9% January 22 nd 31 st, 2014

3 One data point that could be considered bearish was what we saw with Market on Close Imbalances and what they may be saying about passive equity flows.

turned out to be the worst January for MOC Imbalances in the past four years Not only did we see larger sell imbalances, but we saw them more frequently.

3 3 One data point that could be considered bearish was what we saw with Market on Close Imbalances and what they may be saying about passive equity flows. Since 2011, no single sector has posted a negative net imbalance for the month of January until 2014 o Both Financials and Information Technology posted negative MOC imbalances last month in what turned out to be the worst January for MOC Imbalances in the past four years Not only did we see larger sell imbalances, but we saw them more frequently. We measured a net sell imbalance for US Equities 40% of the time this January, which is twice as frequently as 2013 or U.S. Equity Fund flows reported by Lipper last month were a far cry from years past, but by no means the worst we have ever seen. Domestic Equity Funds (including ETFs) saw a meager $977MM of net inflows in January 2014, after a record $12.8Bln Domestic Equity Fund Flows in January It is hard to make much of this in January 2 number, as Lipper reported worse fund flows in 2012; a year in which the S&P 500 was up 13% $645 $977 $11,336 $12,830 One last bit of data worth noting as we hone in on the later portion of the month was ETF volumes. You ll see on the next page that as a whole ETF volumes were merely average for January However, when we break ETF volumes down by week (below) a different picture emerges. In the last two weeks of the month ETF volume climbed to border-line crisis levels amidst an over 3% sell off from the S&P. Sustained levels of 20% or more for ETF volumes as a % of total volume is reminiscent of a type risk on/risk off environment. We like to use ETF volumes as a gauge for how sensitive the market is becoming to Macro issues, and in turn, whether we are entering a binary environment where high correlations associated with high ETF volumes can erode stock-picker s alpha. If levels continue to grow at the rate they did in January, we may be humming a different tune in our February Market Fact Book 19% ETF Volumes As a % of Total Market Volume 15% Week of 27th Week of 21st 14% Week of 13th 14% Week of 6th

13% Ghost 6% POV 5% Arrival 4% CloseIQ 14% VWAP 30% OnePipe 16% Correlations & Volume 25.0% ETF Volumes Pick-up in Late January, Up Small Year over Year 20.0% 15.0% 15.6% 10.0% 5.0% 0.

4 % of Total Volume Liquidity Seeking Standard Strategies 4 Self-Traded Strategy Usage January Strategy Breakdown Strategy Jan. 14 Jan. 13 CloseIQ 13% 9% POV 5% 9% TWAP 13% 1% VWAP 30% 34% Arrival Price 4% 5% Bullseye 2% 1% Capture 10% 6% Ghost 6% 6% OnePipe 16% 28% TWAP & CloseIQ Usage Soars in January Bullseye 2% Capture 10% TWAP 13% Ghost 6% POV 5% Arrival 4% CloseIQ 14% VWAP 30% OnePipe 16% Correlations & Volume 25.0% ETF Volumes Pick-up in Late January, Up Small Year over Year 20.0% 15.0% 15.6% 10.0% 5.0% 0.0% Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Jan US Equity ADV Highest Since June, Up 8% Year over Year Total Market Average Daily Volume CBOE Volatility Index (VIX) CBOE Correlation Index (KCJ) Dec-13 Nov-13 Oct-13 Sep-13 Aug-13 Jul-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13

5 5 Market Structure Recap & Outlook January Highlights Exchanges Delay Implementing Limit Up/Limit Down Curbs for Last 15 Minutes Again Status: Announced December 18 th, 2013 Compliance Time Line: Stage I by August 5 th, Stage II by Dec. 8 th Feb. 24 th, 2014 One of the biggest criticisms of Limit Up/Limit Down (which we explored in our May 2013 Fact Book) is the lack of volatility curbs during last 15 minutes of the trading day. Nasdaq posted an alert on its website on July 23 rd, and then again on December 18 th, stating that the exchanges need more time to test how the curbs will incorporate the closing auction o The scheduled implementation date has been moved from December 8 th, 2013 to February 24 th, 2014 o Testing will be done on Saturday Feb. 8 th and 22 nd, 2014 If a stock is halted due to a LULD pause between 3:50 and 4:00 PM, a Volatility Closing Auction will be held at 4 PM EST ending the pause period and determining the closing price of the security o MOC, LOC, and other close-only orders will participate in the Volatility Closing Auction SEC Tells Exchanges to Stop Planning Pilot Program for Wider Spreads Compliance Time Line: TBD The SEC was charged with analyzing the impact decimalization has had on small-cap, illiquid stocks as part of the JOBS act thanks to an amendment put in place by Republican Senator David Schweikert of Arizona The Committee announced that it completed its analysis on January 31 st and that it opposes a pilot program that would widen spreads for small cap stocks FINRA Plans Investigation into Brokers Routing Practices Compliance Time Line: First half of 2014 Thomas Gira, executive VP of Market Regulation at FINRA told Bloomberg in early January that the regulatory body was planning on sending questionnaires to US brokers in the first half of 2014 regarding their routing practices Concern has arisen over whether or not brokers are routing based on how much each venue costs them as opposed to which venue will provide the best execution for their customers New NYSE CEO Calls for Review of Maker-Taker, Looks to Sell Technology Assets Following the closure of their acquisition, ICE/NYSE CEO Jeffery Sprecher got to work, announcing plans to sell NYSE technology assets like Nyfix, SuperFeed, Wombat and Metabit o ICE is believed to be approaching Fidessa, ITG, Knight and Bloomberg about the sale of these units Later in the month, Mr. Sprecher was quoted in an interview with Reuters calling for regulators to investigate the maker-taker model and the impact it has had on the U.S. market place. o Mr. Sprecher believes, maker-taker pricing or payment for order flow is bad for markets. It creates false liquidity by attracting people who are there sololy to try to make rebates and not actually trade and hold risk.

6 6 The Months Ahead FINRA Releases Details of Official Dark Pool Reporting Overhaul Status: Filed with SEC on Sept. 30, 2013 Compliance Time Line: Effective 90 Days after SEC Approval FINRA filed their official proposal for a Dark Pool reporting rule on September 30 th, the rule would become effective 90 days after SEC approval The new rule would look very similar to what many ATS are already doing: advertising delayed volume statistics o Each ATS would only be required to send FINRA their aggregate weekly volume and number of transactions by symbol o FINRA would then make the data public on a delayed basis: Two weeks for Tier 1 NMS stocks and four-weeks for all other stocks (Tier s are the same as have been used in LU/LD and circuit breaker pilot programs) Full Implementation of Large Trader Not Expect Until 2015 Status: Amended August 8, 2013 Compliance Time Line: See Details (November 1, 2013 & Nov. 30, 2012 Depending) 3 Broker Dealers who are (1) Large Traders or (2) have Large Trader customers that are either broker-dealers or that trade through sponsored access arrangements must have been compliant by Nov. 30 th, 2012 All other Broker Dealers not listed under (1) or (2) in the above line must be compliant by November1 st, 2013 for DMA orders only SEC has moved back the timeline for full implementation to November 2015 Broker-Dealers must attach an LTID to each of the Large Trader s Executions o Amongst other uncertainties, there is no indication whether this is at the parent or subaccount level Broker-Dealers will need to store LTIDs and execution times for all of the Large Trader s orders Broker-Dealers must make data available next day; data will only be provided to SEC upon request and must be submitted via the Electronic Blue Sheet System

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Purple Venue January Break Down 1 BATSY Boston EDGEA

BATs BZX 8.53% B/D Internalized & Other ATS 35.

22% AMEX 0.28% PSX 0.48% BIDs 1.29% Direct Edge 10.

02% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% A

Internalized & Other ATS BATs BZX Boston ARCA BATs BYX

January Average Daily Volume On Major US Exchanges

7 1/2/2014 1/3/2014 1/6/2014 1/7/2014 1/8/2014 1/9/2014 1/10/2014 1/13/2014 1/14/2014 1/15/2014 1/16/2014 1/17/2014 1/21/2014 1/22/2014 1/23/2014 1/24/2014 1/27/2014 1/28/2014 1/29/2014 1/30/2014 1/31/ Venue Market Share & Spreads Avg. Trade Size by Venue in January Inverted Exchanges in Purple Venue January Break Down 1 BATSY Boston EDGEA Arca BATSZ EDGEX Nasdaq NYSE MKT Off-Exchange NYSE BATs BZX 8.53% B/D Internalized & Other ATS 35.46% Boston 3.00% NYSE 10.76% ARCA 10.25% NASDAQ 17.22% AMEX 0.28% PSX 0.48% BIDs 1.29% Direct Edge 10.70% BATs BYX 2.02% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% A Strong Month for Nasdaq Volumes, Up 22% From December Internalized & Other ATS BATs BZX Boston ARCA BATs BYX Direct Edge BIDs PSX AMEX NASDAQ NYSE 1,153,850,651 January Average Daily Volume On Major US Exchanges 720,809, ,122, ,879, ,629, ,237, ,138,920 32,372,340 18,949,353 NASDAQ NYSE Direct Edge ARCA BATs BZX Boston BATs BYX PSX AMEX

8 8 Calendar of Major Upcoming Index Events February Changes March Changes M T W Th F M T W Th F Presidents' Day MSCI U.S. Index Announcement: Expected after Friday, Feb 14th Feb 28th NYSE Arca Goldminers Index Announcement: Friday, March 14th - After Close S&P 1500 Composite Russell IPO Additions NASDAQ 100 Index Announcement: Friday, Announcement: Friday, Announcement: Friday, March 14th - After Close March 14th - After Close March 14th - After Close Effective Date: Monday, March 31st - After Close FTSE 100 Index Announcement: Anytime after Wed, March 12th CRSP US Total Mkt Index Announcement: Monday, March 17th - "Start of the Day" Alerian MLP & MLP Infrastructure Indexes Announcement: Friday, March 14th - 8:35AM

9 9 How to Read the Factor Analysis Our factor analysis breaks down the S&P 500 into 100 groups based on the factors listed on the far left of the chart. Each row takes a factor (e.g. Market Capitalization) and sorts the S&P 500 into 10 groups of 50 based on that factor (called deciles). For example, the first row listed (Market Cap) is sorted from largest to smallest (as indicated) with decile one consisting of the 50 largest stocks in the index and decile 10 consisting of the 50 smallest. It s important to note that a stock in decile one for Market Cap will likely not be in decile one for any other factor. For example, GOOG is in decile one for Market Cap, but decile 10 for Dividend Yield, as it does not pay a dividend. Blue shading means that decile outperformed the S&P, while red shading means the opposite. A simple spread analysis exists on the right which shows the capturable spread between decile one and ten. The growth vs. value decile ranks the S&P 500 names based on their weights in the growth and value 500 indices as described in the figure. Contacts Matthew Ciccone Director of Quantitative Strategy Weeden Program Trading Group mciccone@weedenco.com 1 Venue market share reported by BATs, Direct Edge, BIDs, and Level Daily Trading summary 2 All fund flows reported by Thomas Reuters Lipper Funds, formerly AMG All Market Data is from Bloomberg or NYSE TAQ Disclosure: This publication is prepared by Weeden & Co.'s trading department, and not its research department. This publication is for information purposes only and is based on information and data from sources considered to be reliable, but it is not guaranteed as to accuracy and does not purport to be complete and are subject to change without notice. This publication is neither intended nor should be considered as an offer or the solicitation of an offer to sell or buy any security or other financial product. Nothing contained herein is intended to be, nor shall it be construed as, investment advice. Information contained herein provides insufficient information upon which to base an investment decision. Any comments or statements made herein do not necessarily reflect those of Weeden & Co. LP or its affiliates Weeden & Co. LP.

Full Year 2013 Market Fact Book

Full Year 2013 Market Fact Book Weeden & Co. Weeden Program Trading Group January, 2013 Highlights from our Full Year 2013 Market Fact Book When most people look back on 2013, they are going to undoubtedly