October Market Fact Book Weeden & Co. Weeden Program Trading Group October, 2014

Highlights from our October Market Fact Book With Thanksgiving approaching fast, we decided to kick off this edition of the Fact Book with a look at how equity volumes around the world are affected by the holiday. As expected, things look bleak for volumes in North America and we expect the slowness to spill over into the Western European markets as well. That being said, we’ve generally had strong performance to be “thankful” for around the holiday, particularly on the Wednesday before Thanksgiving. In our opinion, the big story this October was the proliferation of ETF trading which drove US market volumes to their highest level since October 2011. NYSE Arca had its best month for daily volumes in three years, surpassing NYSE by 85MM shares a day—the widest margin in three years as well. ETFs made up almost 20% of US Volumes on a daily basis this October and correlations reached their highest levels since the 2011 crisis. Read about all of this, the many market structure headlines from October, and more 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

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Thanksgiving Volumes, Spreads, Performance Total US Volumes Average Daily Volume It goes without saying that US volumes surrounding Thanksgiving have been significantly below average in recent history. As we approach this year’s holiday expect total US daily volumes to fall precipitously starting the Monday before and continuing through the following Monday. Over the past six years we have seen US volumes drop at least 10% from their near term averages over this time period. The two days that stand out in particular, and should come as no surprise, are the Wednesday before and the Friday (half day) after Thanksgiving. On these days we see volume fall 24% and 56% below normal levels. Even accounting for Friday being a half day we see volumes fall 6% points short of where one would expect US volumes to be.

Volumes Drop Off Before and After Thanksgiving as % ADV

-8%

-10%

-11% -24%

T-3

T-2

T-1

T-Giving

-56% T+1

T+2

Volume Around the Globe on Thanksgiving For those that will be trading around the world on Thanksgiving be prepared for a very slow day. This is especially true in North America, where Canadian volumes have been down an average of 55% from their averages on the day of the US holiday. The other country that sees a consistent and notable drop in volumes on Thanksgiving is the UK, which averages around 83% of an average day. Asian countries, including Australia, have generally been able to fend off the impact of Thanksgiving in the US. Australian volumes have been unaffected by the holiday in each of the past five years.

Global Trading Volumes Mixed when US Markets are Closed Thanksgiving %Vol Traded/20D ADV Traded

40% 20% Canada

0%

U.K. -20%

Japan

-40%

Hong Kong Australia

-60% -80% 2013

2012

2011

2010

2009

3 S&P 500 Performance Around the Holiday For good measure, we took a look at performance around the holiday as well to see if any noticeable trends emerged. Below is the S&P 500’s average performance around Thanksgiving from 2009 through 2013. We excluded 2011, because volatility was elevated due to continued concern over the Euro crisis.

SPX Returns Positive Surrounding Thanksgiving (2009-2013, excl. 2011) 1.2% 0.8%

0.8% 0.6%

0.6%

0.4% 0.0% -0.4%

-0.1%

-0.1%

T+2

T+3

-0.3%

-0.4%

-0.8% T-3

T-2

T-1

TG

T+1

Overall, cumulative returns for the week (and the first two days of the following week) have been positive (.6% on average). The strongest trend we saw for any given day was the Wednesday before Thanksgiving. The market was up every year we studied on Wednesday with an average return of .61% (median .35%). The three days following Thanksgiving also exhibited a strong trend. Three out of four years these days exhibited negative returns averaging -.3%, -.1%, and -.1%.

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Market Structure Recap & Outlook October Market Structure Highlights SEC Sanctions First High Frequency Firm, Athena, for Market Manipulation Details:  Athena fined $1MM for market manipulation o Firm used an algorithm to paint the tape in NASDAQ names o Represented nearly 70% of NASDAQ volumes in the closing seconds from June through December 2009 o Submitted NASDAQ imbalance orders and then traded the opposite side before the close taking advantage of price movements that they had artificially created SEC Rejected BlackRock and Percidian’s Requests to Report Active ETF Holdings Quarterly Details:  SEC rejected Blackrock and Precidian’s requests to create actively managed ETFs that only disclosed their positions quarterly – Oct. 22nd o Rejected on the basis that share price could diverge significantly from NAV without daily disclosure o Blackrock filed request in 2011, Precidian filed earlier in 2014 o Both companies are looking to appeal SEC’s decision Arxis Capital Seeks to Raise $150MM to Start Electronic Market Making Firm Details:  Arxis Capital Seeking to Raise $150MM dollars o Firm started by former CEO of Knight Capital, Tom Joyce, and supported by traders from BOA’s former electronic market-making group o Breaking into retail brokerage execution business, which has traditionally been dominated by firms such as Citadel, KCG, UBS o Has been transacting for Merrill Lynch’s Wealth Management division over the past year SEC Approves NYSE New Order Types Status: Approved on Oct. 9th, 2014 Details:  On October 9th the SEC approved NYSE’s request to offer the following order types o Allow “Add Liquidity Only” (ALO) modifiers for day limit o Allow ALO and time-in-force Intermarket Sweep Orders (ISO’s)  NYSE’s requests were met with opposition from those who believed these new order types would be beneficial for HFT firms in particular. Three key issues were addressed during the SEC review period: o ALO modifier would provide queue priority and encourage orders that are not bona fide o ALO modifier would allow the detection of hidden orders o Day ISO and Day ISO ALO order types are inconsistent with Rule 610 of Regulation NMS

5 SEC Approves NYSE Modifications to Rule 15 Status: Effective Details:  The Exchange proposes to amend Rule 15 to specify that Exchange systems can publish preopening indications and to extend the time order imbalance information is disseminated when an opening is delayed ‘NYSE Regulation’ to Assume FINRA’s Surveillance Responsibilities for NYSE Exchanges Beginning in 2016 Status: Approved, will take effect after FINRA’s contract expires on 12/31/15 Details:  NYSE Group announced on October 6th that NYSE Regulation, a non-profit subsidiary of NYSE LLC, would directly perform market surveillance, investigation, and enforcement functions for NYSE Group’s three equity and two option exchanges after FINRA’s current contract expires on December 31, 2015.  FINRA will continue to perform cross-market surveillance, investigation functions, and registration of broker dealer members for the NYSE Group.

The Months Ahead 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 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 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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Self-Traded Strategy Usage October 2014 Strategy Breakdown

October Strategy Breakdown

Liquidity Seeking

Standard Strategies

Strategy CloseIQ POV TWAP VWAP Arrival Price Bullseye Capture Ghost OnePipe

Oct. '14 6% 13% 3% 28% 3% 4% 17% 6% 19%

Oct. '13 10% 14% 5% 30% 3% 3% 9% 5% 21%

Ghost, 6% CloseIQ, 6%

POV, 13% Capture, 17%

Bullseye, 4% TWAP, 3% IS, 3%

OnePipe, 19%

Custom, 1%

VWAP, 28%

Correlations & Volume % of Total Volume

25%

ETF Market Share Reaches Highest Levels as % of US Volumes since 2011, Up Along with Volatility

19.8%

20% 15% 10% 5% 0%

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

9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

80 70 60 50 40 30 20 10 0

CBOE Vol & Correlation

MM of Shares

Volumes Up in Second Half of Oct., Volatility and Correlation Spike to Highest Levels since 2011

Oct-14

Sep-14

Aug-14

Jun-14

May-14

Mar-14

Feb-14

Dec-13

Nov-13

Oct-13

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October Venue Market Share Average Notional Turnover Reaches Highest Level since 2008 $350

$301

$300 $Bln (USD)

Venue Ocotber Break Down

$250

$219

$231

B/D Internalized & Other ATS 33.97%

$258

$251 $208

$219

$200

NYSE 11.20% AMEX 0.26%

NASDAQ 17.95%

$150

PSX 0.72%

$100 $50

ARCA 12.29% BATs BZX 8.64% Boston 2.21%

$0 2008

12% 10%

2009

2010

2011

2012

2013

2014

BATs BYX 3.70%

Direct Edge 9.07%

ATS Market Share (Oct. 6 - Oct. 31) Barclays Continues to Gain Business, but not Market Share after June Fall 7% 6%

6%

6%

6%

5%

5%

4%

4%

4%

4%

3%

2% 1%

1%

1%

1%

1%

1%

1%

October Average Daily Volume Exchanges Take Back Market Share

1,397,702,731

957,048,407

871,987,439

706,167,603 672,806,916

287,954,058 171,945,136

NASDAQ

ARCA

NYSE

Direct Edge

BATs BZX

BATs BYX

Boston

55,831,826

20,262,918

PSX

AMEX

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October Factor Performance

Equity Fund Flows 2014 Domestic & Foreign Equity Funds Saw Only Small Outflows in October

Cumulative Fund Flows ($MM USD)

Domestic

International

$80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 ($10,000) ($20,000) ($30,000)

$66,181

$24,342

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

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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 [email protected]

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Venue market share reported by BATs, Direct Edge, BIDs, and Level Daily Trading summary All fund flows reported by Thomas Reuters Lipper Funds, formerly AMG

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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.