Summer 2014 Market Fact Book

Weeden & Co.

Weeden Program Trading Group

September, 2014

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

Weeden & Co. LP. Sources: See Contact Page

Highlights from our Summer 2014 Market Fact Book

We’ve got some good news and we’ve got some bad news in our Summer 2014

edition of the Fact Book. First, the bad news: the Summer of 2014 was the worst

summer for US volumes since Bloomberg began calculating consolidated volume in

2008, down 9% from last summer which was the previous low. This August found

a way to be worse for volumes than last August by over 4% despite a small bout

of volatility and increasing correlations as ETF market share rose to its highest

level in a year. The good news is that the market was up over 4%, and despite

macro concerns in the Middle East and Ukraine a “risk-on” trade persisted

throughout. The 50 lowest yielding and highest P/E stocks outperformed the

S&P 500 more than any other groups this Summer, up 9% and 8% respectively.

Market Structure and Regulatory headlines dominated the press this Summer,

with the SEC and Exchanges crafting one of the biggest changes to the

investment landscape since Reg NMS. Surprisingly, the Tick Size Pilot program

took a back seat to allegations of foul play in the Dark Pools of some of the

world’s largest banks. In case you missed anything, we provide a timeline of all

the market structure happenings this Summer and a more detailed review of the

Exchanges’ final Tick Size Pilot Proposal.

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71 Other Pools, 27%

CS Crossfinder,

12%

Barclays, 10%UBS, 9%

Deutsche Bank, 7%

Merrill MLIX, 7%

MS Pool, 6%

SigmaX, 5%

Lava, 5%

IEX, 4%

JP Morgan, 4%

KCGM, 4%

71 Other Pools, 26%

CS Crossfinder

, 13%UBS, 11%

Deutsche Bank, 7%

Merrill MLIX, 7%

MS Pool, 7%

SigmaX, 6%

Lava, 5%

IEX, 5%

JP Morgan, 5%

KCGM, 5%Barclays,

3%

Market Structure & Regulatory Updates

June

June 2nd

– The world gets it first look at

Dark Pool Market Share (left) as FINRA

releases Dark Pool statistics for Tier I

securities. The top ten pools combine for

2/3rds of the market share, with Barclays

capturing 10%.

July

August

Aug. 6th

– NYSE proposes to eliminate 12 order types

(including controversial PL Select order type) in a seemingly

benevolent move that lead to serious criticism as an

opportunity to back-door a rebate eligible Day ISO order

which critics called, ―perhaps the most powerful order type in

the HFT arsenal.‖

June 25th

– New York Attorney

General Eric Schneiderman shook

the investment community by filing

a complaint against Barclays

alleging ―fraud and deceit‖ against

the global investment bank for

practices it took in operating and

marketing its Dark Pool.

July 29th

– UBS says the SEC is

investigating its Dark Pool, while

Deutsche Bank and Credit Suisse

acknowledge they are responding to

requests for information regarding HFT

participation in their Dark Pools as well.

June 24th

– Despite their own committee

advising against it, the SEC ordered major

exchanges to develop and file a plan to

implement wider tick sizes for a subset of

securities pre-determined by the SEC. The

plans will also include a ―trade at‖

requirement on a smaller subset of

securities.

July 23rd

– Barclays fires back at NY AG

and seeks dismissal of Scneiderman’s

lawsuit. Barclays’ claimed the suit

contained ―clear and substantial factual

errors‖ and misinterpreted the law. Most

of the response surrounded different

interpretations of words used in marketing

material, with the bank humorously citing

Webster’s Dictionary multiple times.

Aug. 26th

– The

exchanges file a

finalized plan for

the Tick Size &

Trade-At pilot

program. The SEC

can approve the plan

following a 21 day

comment period.

More details on

Page 2

By the end of the summer, Barclays’ share of Tier I Dark

Pool volume dropped from 10% to 3% according to

FINRA data (left). UBS benefitted the most from Barclays’

demise, with Credit Suisse’s Crossfinder, IEX and

Goldman’s SigmaX taking a marginal portion of the flow.

Though some expected a rebound, there was no

improvement in Barclays’ market share numbers from July

to August.

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Tick Size & Trade-At Pilot Program Exposed

With all the talk these days about data gathering and dark pools, a surprisingly small amount of focus

was placed on the SEC’s landmark “Tick Size Pilot Program,” which was built throughout the summer

by the commission and exchanges. One could argue that this new regulation, which comes despite

concern from industry professionals and the SEC’s own sub-committee, is the single biggest change to the

market structure landscape since Reg NMS went into effect in 2007. In this quick one pager we highlight

some of the implications and nuances of the pilot program buried in the exchanges’ 36 page proposal.

Identification of Pilot Securities & Test Groups

What you may know: Securities eligible for the pilot program have a market cap below $5Bln,

Consolidated Average Daily Volume of one million shares or less, a simple average VWAP of at

least $2 over the measurement period, a closing price of at least $2 at the end of the measurement

period and closes above $1.50 every day during the measurement period.

What you may not know: The exchanges have come up with a convoluted selection

methodology called ―stratified random sampling.‖ All selected securities will be broken into

(ideally) 27 groups based on liquidity, market cap, and price (VWAP) relative to the rest of the

universe (low, medium, and high). Four hundred securities will then be randomly selected from

each of these sub-groups, and the remaining securities will constitute the control group.

Test Group I: Possibly the most confusing of test groups. These stocks will be quoted in $0.05 minimum

increments but may trade at any price increment that is currently permitted. For whatever reason, orders

entered in an Exchanges retail liquidity program may be accepted in increments of less than $0.05.

Test Group II: These stocks must be quoted and must trade in $0.05 minimum increments, both on

AND off exchanges with a few exceptions: midpoint, retail orders with price improvement of $0.005 or

better, and the ambiguously defined ―negotiated trades‖ (tied to any pre-arranged benchmark).

Test Group III: These stocks will have the exact same rules as Test Group II, plus the additional ―Trade-

At‖ caveat.

Trade-At “Prohibition” Explained

Given all of the exemptions (some more ambiguous than others) already allotted for each of the test

groups, we were most curious about how some of the initial Trade-At exemption language was clarified

in the final plan—unfortunately it wasn’t. Here are the major exemptions to Trade-At:

Orders of ―Block size‖

Retail Orders executed with at least $0.005 price improvement

The order is identified as an ISO

The order is executed by a venue that concurrently sent ISO orders to the venue with the best

displayed Bid or Offer against the full displayed size

The order is executed as part of a ―Negotiated Trade‖

Stopped orders for customers that are priced at the BBO when the stop is elected

With so many exemptions, you have to ask why even have a ―trade-at‖ rule to begin with? It looks like

for the most part, broker internalization (both electronically in dark pools and manually up-stairs) will

remain intact as it pertains to block trades, stops, and any other benchmark (VWAP, Close, Open) trades.

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Self-Traded Strategy Usage

August Strategy Breakdown

Strategy July ‘14 July ‘13

Stan

dar

d

Stra

tegi

es CloseIQ 8% 8%

POV 12% 8%

TWAP 3% 2%

VWAP 17% 47%

Arrival Price 2% 3%

Liq

uid

ity

Seek

ing

Bullseye 5% 10%

Capture 14% 6%

Ghost 8% 4%

OnePipe 30% 37%

Equity Fund Flows

Liquidity Seeking Strategies Dominate Flows in August

Bullseye5%

Capture14%

CloseIQ8%

Custom1%Ghost

8%

OnePipe30%

Arrival Price2%

POV12%

TWAP3%

VWAP17%

Global Equity Funds Took in over $30Bln this Summer

Bond Funds Pull in about $20Bln

$9,789

$22,742

$19,863

$2,933

US Equity International Equity Taxable Bond Funds Muni Bond Funds

Net Fund Flows (MM USD)

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Venue Market Share

921,252,776

649,193,674

582,700,617 527,946,028

398,798,970

193,384,208 138,990,483

26,689,369 20,992,994

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

Average Daily Volume this SummerFor Major US Exchanges

NYSE11.69%

NASDAQ16.59% AMEX

0.38%

PSX0.48%

Direct Edge9.50%BATs BYX

3.48%

ARCA10.49%

Boston2.50%

BATs BZX7.18%

B/D Internalized & Other ATS

37.71%

Venue Summer '14 Break Down1

17%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

% o

f To

tal V

olu

me

ETF Market Share Rises with the HeatAugust Numbers Highest Since February

8,371

9,351

8,337 8,236

6,123 6,088 5,553

2008 2009 2010 2011 2012 2013 2014

Average Daily US Equity Volume for Each Summer Since 2008

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Summer Factor Performance

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.

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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.