September Market Fact Book Weeden & Co.

Weeden Program Trading Group

September, 2013

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

Highlights from our September Market Fact Book

An impending government shut down, potential default and the ensuing ratings

down grade was no match for the US Equity markets last month. Though the

headlines were almost identical to the summer of 2011, the financial data could

not have been more different. Rather than record correlations, we saw a record

number of initial public offerings. Rather than “Risk Off,” almost every major

factor was spewing “Risk On.”

Another major US Exchange halted trading due to a technology error, just days

after the exchanges met with the SEC to discuss contingency plans in the event

of another “Flash Freeze.” Amongst the fray of negative press plaguing the

exchanges, the much anticipated, buy side owned IEX officially received approval

to operate as an ATS, with hopes of becoming an exchange in the not-so-distant

future.

U.S. equity volumes were up 12% from August, but off-exchange volume remains

at all time highs. See this, and much more, in our September Fact Book…

2

Weeden Study Shows Effectiveness of NYSE Imbalance Process

On September 17th, we released a study that focused on the impact single stock imbalances have on performance in the last 10 to 15 minutes of the trading day. The study (which can be found at this link) marks the third we have done this year that focus on the increasing importance of the closing auction.

Large Imbalances at NYSE Have No Relationship With Performance

Russell 1000 Russell 2000

Frequency Data for 3:45 Imbals Frequency Data for 3:45 Imbals

Sell Imbals Buy Imbals Sell Imbals Buy Imbals

Negative Perf. Positive Perf. Negative Perf. Positive Perf.

> 5% of ADV 63% 58% 52% 58%

> 10% of ADV 56% 30% 47% 55%

Frequency Data for 3:55 Imbals

Frequency Data for 3:55 Imbals

> 5% of ADV 54% 45% 48% 55%

> 10% of ADV 53% 37% 47% 62%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2007 2008 2009 2010 2011 2012 2013

Ave

rage

% o

f D

ays

Vo

lum

e

Average Close for a Russell 1000 Stock by Year

Fig. 1

As more and more volume moves to the close (Fig. 1), it is important for institutions to understand the efficiencies, and inefficiencies, of the entire closing auction process at both exchanges. This particular study focused on the process that surrounds the publication of market on close imbalances at each exchange, and how those processes can impact trading on a single stock basis. Below we talk about some of the main conclusions from our piece…

Attempting a linear regression on the imbalance data for NYSE listed stocks was futile, as there are too many outliers and almost no correlation to the direction of the imbalance, and the direction of the stock. The above chart shows the percentage of stocks that move in the direction of their imbalance after it is published, and as you can see the data is a mixed bag at best. We believe this illustrates how effective the process for closing stocks at the NYSE is. The imbalances clearly function as a way to bring together buyers and sellers without causing price dislocation, and we believe the primary reason for this is the d-Quote system (which we explain in our full analysis at the above link). We say this because we see the opposite occur with large published imbalances at Nasdaq. We also go into greater detail in our full note, and caution traders against publishing large imbalances at Nasdaq.

3

Government Woes Can’t Faze the Market

21

15

5

12

8

1

2013 2012 2011 2010 2009 2008

Number of US IPOs in the Month of September

If you turned on the news in late September, all you heard about was the impending government deadlines and the devastating impact they could have on financial markets. It was eerily reminiscent of the summer of 2011, complete with threats of downgrades and government shut downs. What was not reminiscent of the summer of 2011 was the way the market behaved this September. Though the S&P was up almost 3% last month, it was the litany of other data points that convinced us things are very different from 2011 and even 2008….

IPOs are at record levels. According to Bloomberg, twenty one US Companies IPOed in September 2013, with Twitter (sure to be the hottest tech IPO since Facebook) announcing plans for its IPO mid-month

o This marks the most IPOs in the month of September this decade

Factor performance far from risk-off. Summer 2011 gave a new meaning to the term “risk off trade,” as just about every time we looked at factor performance in July and August 2011, we saw the same thing

o One of the big themes of the summer of 2011 was yield, with REITs and Utilities constantly outperforming the broader market

o This September the 50 highest yielding stocks were the worst performing group in the S&P 500, while the 50 Most Volatile Stocks, 50 stocks with the highest short interest, and 100 stocks with the Highest P/E were the best performing groups last month—far from “Risk off” (See Page 9)

Short interest near historic lows. The median short interest for S&P 500 stocks (as a % of shares outstanding) continues to remain at all time lows, down almost 50% from 2007/2008 levels and 16% from 3Q 2011 levels.

US equity funds post another month of inflows. For the fifth month this year, domestic equity funds have posted net inflows according to Thomson Reuters Lipper Funds. This brings the total to a net +$73Bln dollars for US Funds in 2013

Single stock correlations are half of their 2011 levels. Another big story from 2011 was the record high realized and implied correlations we saw in US Equities. In September 2011, the CBOE Implied Correlation index was above .90! Last month, levels remained well below .50 despite tapering and US Government woes

All these statistics seem to defy what we have come to know as conventional wisdom. We believe this speaks directly to confidence returning to the US Equity Markets; a measure which many believe is far more important than the near term performance of the major indices…

4

Self-Traded Strategy Usage

September Strategy Breakdown

Strategy September 2013 YTD

Stan

dar

d

Stra

tegi

es CloseIQ 12% 10%

POV 9% 10%

TWAP 5% 2%

VWAP 35% 33%

Arrival Price 2% 3%

Liq

uid

ity

Seek

ing

Bullseye 4% 3%

Capture 7% 7%

Ghost 8% 7%

OnePipe 17% 24%

Correlations & Volume

OnePipe Usage Down, as Customers Shift to Schedule-Based Execution in September

VWAP 35%

OnePipe 17%

CloseIQ 12%

POV 9%

Ghost 8%

Capture 8%

Bullseye 4%

TWAP 5%

Arrival Price 2%

0

1000

2000

3000

4000

5000

6000

7000

8000

Sep-1

2

Oct-1

2

No

v-12

Dec-1

2

Jan-1

3

Mar-1

3

Ap

r-13

May-1

3

Jun

-13

Jul-1

3

Sep-1

3

0

10

20

30

40

50

60

70

80

US Equity Volumes Up 12% In September, Down 5% Year over Year

Total Market Average Daily Volume CBOE Volatility Index (VIX) CBOE Correlation Index (ICJ)

16.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept

% o

f To

tal V

olu

me

ETF Volumes Stay Muted, Down 20% From their June 2013 Highs

5

Market Structure Recap & Outlook Next Stage of Large Trader Becomes Effective for DMA Flow on November 1

st

Status: Amended August 8, 2013

Compliance Time Line: See Details (November 1, 2013 & Nov. 30, 2012 Depending)3

Details:

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. 30th, 2012

All other Broker Dealers not listed under (1) or (2) in the above line must be compliant by

November1st, 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 sub-

account 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

Buyside-Owned IEX Completes FINRA Registration

Status: Approved September 26th, 2013

Compliance Time Line: Expected Launch Date of October 25th

Details:

With ambitions of becoming a full-fledged US Exchange, 100% buyside owned firm IEX plans to

begin operating as a “Dark Pool” on October 25th, 2013

The firm will seek approval to operate as an ECN before December

The exchange founders pledge that there will be no broker/dealer interest in the firm, as concerns

grow over the routing practices of broker/dealers who operate Alternative Trading Systems

IEX will disincentivize HFT by introducing latency in to order process

There will be no rebates for providing liquidity

US Exchanges Agree to Deploy “Kill Switches”

Status: Emergency Meeting Held with SEC on Sept. 12th, 2013

Details:

Following the technology issues at Nasdaq that shut down the exchange for over three hours in

August, the exchanges met with the SEC to discuss a plan of action in the event another major

technology glitch occurs

On September 13th, the exchanges announced plans to design kill switches that would shut down

trading in the event a major technology glitch plagued one or all of the major exchanges

6

The Months Ahead

FINRA Moves Closer to Requiring Odd Lots to Print to the Tape

Status: Announced July 23rd

, 2013

Compliance Time Line: Non-NMS Securities “on or about” October 7th, 2013

Details:

As conversations about the impact odd lot trades have on the integrity of the marketplace

continue, FINRA has announced plans that will set the stage for requiring odd lot trades to be

reported to the consolidated tape in all US Securities.

On or about October 7th, FINRA will require odd lot trades in non-NMS securities that trade over

the counter to print to the tape.

FINRA will introduce a new trade condition modifier (“I”) that will be appended to odd lot

trades.

o FINRA has emphasized that odd lot trades will now appear in each stock’s aggregate

volume statistics

Exchanges Delay Implementing Limit Up/Limit Down Curbs for Last 15 Minutes

Status: Announced July 23rd

, 2013

Compliance Time Line: Stage I by August 5th, Stage II by Dec. 8

th

Details:

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 the first and last 15 minutes of the trading day.

Plans to extend the pilot-program’s curbs to the first 15-minutes of the trading day (Stage I) were

already moved back from August 1st to August 5

th, and now the exchanges are seeking to extend

implementation during the last 15 minutes as well.

Nasdaq posted an alert on its website on July 23rd

stating that the exchanges need more time to

test how the curbs will incorporate the closing auction.

o The scheduled implementation date has been set as December 8th, 2013

Exchanges Begin Drafting Pilot Program for Wider Spreads

Compliance Time Line: TBD

Details:

According to a report received by Bloomberg News, the exchanges have begun drafting a

proposal for a six month pilot program that would widen tick sizes to as much as 10 cents for

“emerging companies”

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

As it is currently written, the pilot program will feature 100 securities, though participation by

market makers would be optional

7

FINRA Approves Dark Pool Reporting Overhaul

Status: Approved July 15th, 2013

Compliance Time Line: Plans to Propose to SEC in Early August

Details:

FINRA approved a proposal that would require all Alternative Trading Systems to disclose stock

by stock trading information to FINRA at the end of each week

FINRA plans to make all the advertisement data available on its website following publication

Each venue would be assigned its own identifier, similar to ones already assigned to exchanges

for tape-reporting

FINRA plans to bring the proposal to the SEC for adoption in early August

8

NYSE 12.33%

NASDAQ 15.23%

AMEX 0.36%

PSX 0.66%

BIDs 1.03%

Direct Edge 10.59%

BATs BYX 1.89%

ARCA 10.04%

Boston 2.51%

BATs BZX 7.83%

B/D Internalized & Other ATS

37.54%

Venue September Break Down

39%

30% 31% 32% 33% 34% 35% 36% 37% 38% 39% 40%

Off-Exchange Volumes Remains at All-Time Highs

Venue Market Share

931,058,167

754,087,838

647,753,996 613,704,534

478,934,697

153,389,777 115,458,319

40,502,492 21,808,621

NASDAQ NYSE Direct Edge ARCA BATs BZX Boston BATs BYX PSX AMEX

September Average Daily Volume On Major US Exchanges

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

9/3

/20

13

9/4

/20

13

9/5

/20

13

9/6

/20

13

9/9

/20

13

9/1

0/2

01

3

9/1

1/2

01

3

9/1

2/2

01

3

9/1

3/2

01

3

9/1

6/2

01

3

9/1

7/2

01

3

9/1

8/2

01

3

9/1

9/2

01

3

9/2

0/2

01

3

9/2

3/2

01

3

9/2

4/2

01

3

9/2

5/2

01

3

9/2

6/2

01

3

9/2

7/2

01

3

9/3

0/2

01

3

One Month After "Flash Freeze," BATS BYX Shuts Down Intraday Internalized & Other ATS

BATs BZX

Boston

ARCA

BATs BYX

Direct Edge

BIDs

PSX

AMEX

NASDAQ

NYSE

9

September Factor Performance

Equity Fund Flows2

$(20)

$(10)

$-

$10

$20

$30

$40

Jan Feb Mar Apr May Jun Jul Aug Sep

Ne

t Fl

ow

s ($

BLN

)

Despite Taper & US Budget Concerns, Money Flows into Domestic Equity Funds Bringing Net Inflows to $73Bln for 2013

10

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 203.861.9320 mciccone@weedenco.com

1 Venue market share reported by BATs, Direct Edge, BIDs, and Level Daily Trading summary

2All 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. 2011 Weeden & Co. LP.