[Federal Register Volume 77, Number 202 (Thursday, October 18, 2012)]
[Notices]
[Pages 64167-64170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-25600]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68042; File No. SR-NASDAQ-2012-117]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change With Respect to INAV Pegged
Orders for ETFs
October 12, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that, on October 2, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been substantially prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASDAQ proposes to amend Rule 4751(f)(4) to include a new Intraday
Net Asset Value (``INAV'') Pegged Order for Exchange-Traded Funds
(``ETFs'') where the component stocks underlying the ETFs are U.S.
Component Stocks as defined by Rule 5705(a)(1)(C) and 5705(b)(1)(D)--
hereafter defined as ``U.S. Component Stock ETFs.''
The text of the proposed rule change is set forth below. Proposed
new text is in italics and deleted text is in brackets.
4751. Definitions
The following definitions apply to the Rule 4600 and 4750 Series
for the trading of securities listed on Nasdaq or a national securities
exchange other than Nasdaq.
(a)-(e) No change.
(f) The term ``Order Type'' shall mean the unique processing
prescribed for
[[Page 64168]]
designated orders that are eligible for entry into the System, and
shall include:
(1)-(3) No change.
(4) ``Pegged Orders'' are orders that, after entry, have their
price automatically adjusted by the System in response to changes in
either the Nasdaq Market Center inside bid or offer, [or] bids or
offers in the national market system, or in respect of Exchange Traded
Funds of U.S. Component Stocks (as defined in Rule 5705), changes in
the intraday net asset value (``INAV''), as appropriate. A Pegged Order
can specify that its price will equal the inside quote on the same side
of the market (``Primary Peg''), the opposite side of the market
(``Market Peg''), or the midpoint of the national best bid and offer
(``Midpoint Peg'') or, in the case of Exchange Traded Funds of U.S.
Component Stocks, the INAV (``INAV Peg''). A Pegged Order may have a
limit price beyond which the order shall not be executed. In addition,
the Primary Peg, [and] Market Peg and INAV Peg Orders may also
establish their pricing relative to the appropriate bids, [or] offers
or INAV by the selection of one or more offset amounts that will adjust
the price of the order by the offset amount selected. A Midpoint Peg
Order is priced based upon the national best bid and offer, excluding
the effect that the Midpoint Peg Order itself has on the inside bid or
inside offer. Midpoint Pegged Orders will never be displayed. A
Midpoint Pegged Order may be executed in sub-pennies if necessary to
obtain a midpoint price. A new timestamp is created for the order each
time it is automatically adjusted.
(5)-(15) No change.
(g)-(i) No change.
* * * * *
The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaq.cchwallstreet.com, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
NASDAQ proposes to amend Rule 4751(f)(4) to establish INAV Pegged
Orders which will be available for U.S. Component Stock ETFs. This new
order type will serve market participants that utilize these ETFs as a
vehicle to invest or trade in addition to serving the needs and
interests of the Sponsors/Issuers of ETFs.
The ETF INAV Pegged Order will be priced relative to the Intraday
Net Asset Value of the fund's underlying portfolio. The term ``INAV''
is synonymous with commonly used terms such as Intraday Indicative
Value (IIV), Intraday Optimized Portfolio Value (IOPV) and Intraday
Portfolio Value (IPV) amongst others. The INAV is intended to
approximate the fair value of the securities held in the portfolio by
the ETF and should closely represent the value of the fund during the
trading day. Pursuant to NASDAQ listing rules, the INAV for NASDAQ-
listed stocks is disseminated widely to vendors and their subscribers
via multiple data feeds, including UTP Level 1, NASDAQ Basic, NASDAQ
Level 2, and NASDAQ TotalView. INAVs are typically disseminated at
least once every 15 seconds. Rule 5705(a)(3)(C), for example, requires
that the IIV for NASDAQ listed portfolio depository receipts be
disseminated at least every 15 seconds.
Typically, INAVs are calculated using the last sale prices of the
fund's components. INAVs can vary from the fund's market price and/or
can be valued outside of the fund's prevailing bid/ask spread as a
result of the supply and demand characteristics of the fund and/or
liquidity present in the marketplace. The INAV may remain unchanged for
a certain period of time if the underlying values do not change,
particularly in periods of low volatility. Additionally, the INAV may
become stale as a result of a compromised data feed or disruption to
the calculation and/or dissemination agent or other technology related
malfunction.
The fair market price of an ETF is more objective than the market
price of a cash equity. Mainly, the price of an ETF is based upon the
price of the underlying portfolio of the ETF. Therefore, if the
components of the portfolio increase in value, so does the fund and,
conversely, if the components of the portfolio decrease in value, so
does the fund. In the cash equities marketplace, pricing is more
subjective in nature. Unfavorable executions occur in the ETF
marketplace and this can be as a result of market participants not
recognizing the liquidity characteristics of the product they are
trading. Executions can occur with drastic variance from the INAV,
usually as a result of participants relying on market orders for
execution. The INAV Pegged Order type will be available for all U.S.
Component Stock ETFs where there is dynamic INAV data and will offer
market participants a greater level of transparency as to fair value,
by bringing what has historically been a post-trade analytics tool into
the pre-trade environment. More importantly, the INAV Pegged Order
should minimize the disparity between the market execution price and
the underlying fund's value.
Pegged Orders are orders that, once entered, adjust in price
automatically in response to changes in factors such as the NBBO,
depending upon the type of Pegged Order. An INAV Pegged Order will
specify that its price will equal (or, to the extent an offset is used,
be offset from) the prevailing INAV for the relevant ETF. As the INAV
changes, so move the INAV Pegged Orders. In the event that the INAV
data feed for a particular ETF were to be compromised or temporarily
stopped being disseminated, the use of the INAV Pegged Order type for
that ETF would be suspended (i.e., no new INAV Pegged Orders would be
accepted into the system) and orders utilizing the INAV pegged
functionality for that ETF already in the system would be cancelled.
The suspension of new INAV Pegged Orders would remain in effect until
such time as the Exchange was confident that the integrity of the INAV
data feed had been restored.
The proposed rule change is in accordance with Rule 612 of
Regulation NMS,\3\ which governs sub-penny quoting of National Market
System stocks (``Sub-Penny Rule''). The proposed rule change would not
result in the display, rank, or acceptance of a bid or offer, an order,
quotation, or indication of interest in any NMS stock that is priced in
an increment smaller than $0.01 per share, unless the price of the bid
or offer, order, indication of interest is priced less than $1.00 per
share.
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\3\ 17 CFR 242.600 et seq. See also Securities Exchange Act
Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005)
(``Regulation NMS Adopting Release'').
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NASDAQ intends to use an INAV as opposed to the end of day net
asset value (``ED NAV'') for a number of reasons. While the ED NAV is
more
[[Page 64169]]
definitive in nature, it does not allow for an intraday fund valuation,
thus limiting one of the greatest advantages of the ETF structure,
mainly the ability to trade throughout the entire trading session, as
compared to the traditional Mutual Fund (which uses ED NAV based
execution). Conversely, use of the INAV, while only indicative of the
ETF's value, offers investors a trade execution tool which should lead
to a greater level of transparency as it relates to the ETF's current
value. Relative to the current intraday order entry/execution order
types, the INAV Pegged Order type would allow certainty of execution
with a greater correlation to the ETF's fair value for those seeking to
invest on a more informed basis. However, despite NASDAQ's rationale
for using the INAV, investors should note that the INAV is only an
estimation of a fund's value, and this might differ from the ED NAV
which is more definitive and disseminated on a daily basis at the end
of the trading day. Investors should also note that INAVs are only
calculated and disseminated during the regular market session.
A Pegged Order may have a limit price beyond which the order shall
not be executed. Currently, Primary Peg and Market Peg Orders may
establish their pricing relative to the appropriate bids or offers by
selecting one or more offset amounts that will adjust the price of the
order by the offset amount selected. We propose to introduce this
functionality for the INAV Peg also.
A Pegged Order (other than a Midpoint Peg Order) may be both
displayed or non-displayed. We propose to introduce this functionality
for the INAV Peg also. Where market participants see value in anonymity
they can utilize the non-displayed order type, though by doing so, they
will be placed lower in the priority queue within each price point.
Conversely, those that do not value anonymity can utilize a displayed
order type and benefit from a higher priority in the execution queue.
The following examples illustrate how the proposed rule change
would operate (note that the price of the order updates in response to
changes in the INAV):
Example 1
The best bid is $20.00 and the best offer is $20.06 at
10:00:00 a.m. INAV is updated and published as $20.03 at 10:00:02.
An INAV Peg Order to buy entered at 10:00:04 would be
priced at $20.03.
The best bid would update to $20.03 (at approximately
10:00:04).
The best offer would remain at $20.06.
Example 2
The best bid is $20.00 and the best offer is $20.06 at
10:00:00. INAV is updated and published as $19.98 at 10:00:02.
An INAV Peg Order to sell entered at 10:00:04 would be
priced at $19.98 and subsequently execute at $20.00 (at approximately
10:00:04).
Example 3
The best bid is $20.00 and the best offer is $20.10 at
10:00:00 a.m. INAV is updated and published as $20.03 at 10:00:02.
An INAV Peg Order to buy with a +.03 offset entered at
10:00:04 would be priced at $20.06 ($20.03 +.03) (at approximately
10:00:04).
The best bid would update to $20.06 (approximately
10:00:04).
The best offer would remain at $20.10.
INAV Peg Orders will allow the market participant to achieve a
greater sense of control over the execution price as it relates to the
fund's value by benchmarking to the estimated intraday fund's value.
This added value to the investing public will be strongly supported by
the ETF Sponsor community. ETF Sponsors routinely deal with investors
that have been subject to inferior executions. These complaints are
almost unanimously as a result of people using market orders where the
prevailing bid/ask in the market does not necessarily correlate to the
fund's value, and the quoted size does not meet the demand of the
order. The INAV Peg will also help to protect investors against any
unintended overpayment for the security.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\4\ in general, and furthers the objectives of Section 6(b)(5),\5\
in particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, and to
remove impediments to and perfect the mechanism of a free and open
market and a national market system. The INAV Pegged Order will allow
market participants the option to enter an order without concern about
the value of the fund's underlying portfolio being drastically
different and therefore resulting in an inferior execution, as the
order will be dynamically repriced/updated throughout the life of the
order as the value of the underlying portfolio changes. Additionally,
it provides a more intelligent form of market order. Instead of having
the order execute at the prevailing price (regardless of what that
price might be relative to the fund's value) the INAV Pegged Order
gives participants the option to collar the execution at a price that
relates to the actual value of the fund's components. Whilst it is
acknowledged that there is an inherent lack of execution determinism
with a Pegged Order, market participants will be free to elect this
order type for U.S. Component Stock ETFs where there is dynamic INAV
data, but they will not be limited to this option, or required to use
this option. For those market participants who are more interested in
securing execution certainty, a conventional market order will still be
available.
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\4\ 15 U.S.C. 78f(b).
\5\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed change to Rule 4751(f)(4)
meets the requirements of Section 6(b)(5) of the Act \6\ in that it
will improve the stability, quality, and transparency of the national
market system. In the event that the INAV data feed were to be
compromised or temporarily stopped being disseminated, the use of the
INAV Pegged Order type would be suspended (i.e., no new INAV Pegged
Orders would be accepted into the system) until such time as the
Exchange was confident that the integrity of the INAV data feed had
been restored and orders utilizing the INAV pegged functionality
already in the system would be cancelled. In addition, the Exchange is
not aware of any circumstance where this order type could be used to
manipulate the underlying value of the fund, and Nasdaq MarketWatch
will perform all usual market surveillance activity on the use of the
INAV Pegged Order.
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\6\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. To the contrary,
NASDAQ believes that the INAV Peg Order is pro-competitive in that it
will offer enhance [sic] the attractiveness of NASDAQ's listings and
trading venues.\7\
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\7\ See Form 19b-4 at 11.
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[[Page 64170]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2012-117 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2012-117.This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NASDAQ-2012-117 and should
be submitted on or before November 8, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25600 Filed 10-17-12; 8:45 am]
BILLING CODE 8011-01-P