Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove Proposed Rule Change With Respect to INAV Pegged Orders for ETFs, 4949-4955 [2013-01225]
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Federal Register / Vol. 78, No. 15 / Wednesday, January 23, 2013 / Notices
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Pursuant to Section 19(b)(3)(A)(ii) of
the Act 10 and Rule 19b–4(f)(2)
thereunder,11 the Exchange has
designated this proposal as establishing
or changing a due, fee, or other charge
applicable to the Exchange’s Members
and non-members, which renders the
proposed rule change effective upon
filing.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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:
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–BYX–2013–001 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–BYX–2013–001. 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 (https://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 such
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–BYX–
2013–001, and should be submitted on
or before February 13, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–01221 Filed 1–22–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68672; File No. SR–
NASDAQ–2012–117 ]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Instituting Proceedings To Determine
Whether To Approve or Disapprove
Proposed Rule Change With Respect
to INAV Pegged Orders for ETFs
January 16, 2013.
I. Introduction
On October 2, 2012, The NASDAQ
Stock Market LLC (‘‘NASDAQ’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend NASDAQ Rule 4751(f)(4) to
adopt a new Intraday Net Asset Value
(‘‘INAV’’) Pegged Order for ExchangeTraded Funds (‘‘ETFs’’) where the
component stocks underlying the ETFs
are U.S. Component Stocks (as defined
by NASDAQ Rule 5705(a)(1)(C) and
12 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
10 15
U.S.C. 78s(b)(3)(A)(ii).
11 17 CFR 240.19b–4(f)(2).
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4949
5705(b)(1)(D)) 3 (‘‘U.S. Component Stock
ETFs’’). The proposed rule change was
published for comment in the Federal
Register on October 18, 2012.4 The
Commission received one comment
letter on the proposal.5 On November
21, 2012, pursuant to Section 19(b)(2) of
the Act,6 the Commission designated a
longer period within which to either
approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to disapprove the proposed
rule change.7 On January 15, 2013, the
Commission received the Exchange’s
response to the comment letter.8 This
order institutes proceedings under
Section 19(b)(2)(B) of the Act 9 to
determine whether to approve or
disapprove the proposed rule change.
II. Description of the Proposal
The Exchange proposes to amend
NASDAQ Rule 4751(f)(4) to establish
INAV Pegged Orders that would be
available only for U.S. Component Stock
ETFs. The INAV Pegged Order type
would be available for all U.S.
Component Stock ETFs where there is
dynamic INAV data. The INAV Pegged
Order would be priced relative to the
INAV of the fund’s underlying portfolio.
According to the Exchange, the INAV is
intended to approximate the fair value
of the securities held in the portfolio by
an ETF,10 and the Exchange represents
that the INAV should closely represent
the value of the fund during the trading
3 Rule 5705 contains NASDAQ’s listing standards
for ETFs (which include Portfolio Depositary
Receipts and Index Fund Shares).
4 See Securities Exchange Act Release No. 68042
(October 12, 2012), 77 FR 64167 (‘‘Notice’’).
5 See Letter from Dorothy Donohue, Deputy
General Counsel, Investment Company Institute, to
Elizabeth M. Murphy, Secretary, Commission, dated
November 8, 2012 (‘‘ICI Letter’’).
6 15 U.S.C. 78s(b)(2).
7 See Securities Exchange Act Release No. 68279
(November 21, 2012), 77 FR 70857 (November 27,
2012). See also Securities Exchange Act Release No.
68279A (December 4, 2012), 77 FR 73716
(December 11, 2012) (correcting certain
typographical errors). The Commission determined
that it was appropriate to designate a longer period
within which to take action on the proposed rule
change so that it has sufficient time to consider the
proposed rule change. Accordingly, the
Commission designated January 16, 2013 as the
date by which it should approve, disapprove, or
institute proceedings to determine whether to
disapprove the proposed rule change.
8 See Letter from Stephen Matthews, Senior
Associate General Counsel, NASDAQ OMX, to
Elizabeth M. Murphy, Secretary, Commission, dated
January 15, 2013 (‘‘Response Letter’’).
9 15 U.S.C. 78s(b)(2)(B).
10 The Exchange states that investors should note
that the INAV is only an estimation of a fund’s
value, and this might differ from the end of day net
asset value, which is more definitive and
disseminated on a daily basis at the end of the
trading day. See Notice, supra note 4, at 64169.
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day.11 According to the Exchange,
INAVs are typically calculated using the
last sale prices of the fund’s
components.12 The Exchange represents
that, pursuant to NASDAQ listing rules,
the INAV for NASDAQ-listed ETFs is
disseminated widely to vendors and
their subscribers via multiple data feeds,
including UTP Level 1, NASDAQ Basic,
NASDAQ Level 2, and NASDAQ
TotalView, and that INAVs are typically
disseminated at least once every 15
seconds during the regular market
session.13
Generally, Pegged Orders are orders
that, once entered, adjust in price
automatically in response to changes in
factors, such as the national best bid or
offer, depending upon the type of
Pegged Order. An INAV Pegged Order
would 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, the
INAV Pegged Orders would change
therewith. 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 Order 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.
A Pegged Order may have a limit
price beyond which the order shall not
be executed. In addition, certain Pegged
Orders (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. The
Exchange proposes to similarly
11 See Notice, supra note 4, at 64168. According
to the Exchange, the term ‘‘INAV,’’ as used by the
Exchange in its proposal, would be synonymous
with commonly used terms such as Intraday
Indicative Value (IIV), Intraday Optimized Portfolio
Value (IOPV) and Intraday Portfolio Value (IPV),
among others. Id.
12 The Exchange states that 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, among other things, the supply and
demand characteristics of the fund and/or liquidity
present in the marketplace. See Notice, supra note
4, at 64168. In addition, the Exchange states that the
INAV may remain unchanged for a certain period
of time if the underlying values do not change,
particularly in periods of low volatility, and that 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. Id.
13 See id.
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introduce this functionality for the
INAV Pegged Order type. Moreover,
similar to other Pegged Orders (other
than a Midpoint Peg Order), the
Exchange proposes that an INAV Pegged
Order may be either displayed or nondisplayed. If a market participant
utilizes the non-displayed order type, its
order will be placed lower in the
priority queue than displayed orders
within each price point.
The Exchange provides the following
examples to illustrate how the INAV
Pegged Order type 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.
III. Summary of Comment Letters and
the Exchange’s Response
The Commission received one
comment letter on the proposed rule
change.14 The commenter raises a
number of concerns and requests a
number of clarifications relating to the
proposal, each of which is described
below. The commenter notes that while
it does not necessarily object to the
creation of a new order type pegged to
INAV, it believes the Commission
should request additional information
from the Exchange to further explore the
14 See
PO 00000
ICI Letter, supra note 5.
Frm 00123
Fmt 4703
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questions and concerns it raises, and
consider the benefits and risks of the
proposed INAV Pegged Order, before
determining whether to approve it.15
A. Questions Regarding the Purpose and
Benefits of the Proposal
First, the commenter states that its
members have questioned the purpose
and benefit to market participants of an
order type pegged to INAV.16 The
commenter notes that in its filing the
Exchange states that ‘‘ETF Sponsors
routinely deal with investors that have
been subject to inferior executions,’’ 17
and that the vast majority of these
complaints result from people using
market orders where the prevailing
market price either does not correlate to
the fund’s value, or the quoted size does
not meet the demand of the order (or
both).18 The commenter believes the use
of limit orders generally addresses the
concerns highlighted by the Exchange,
and that investor confusion regarding
order types likely explains the
inopportune use of market orders.19 The
commenter further believes that
educating investors on the proper use of
existing order types may be preferable to
the creation of another order type.20
Moreover, the commenter states that the
problems with execution typically occur
in ETFs that would not be covered by
the new order type, i.e., those based on
fixed income and non-US equity
securities, and that most ETFs
comprised of U.S. equities are very
liquid and trade with fair price
execution.21
In response to these comments, the
Exchange states its belief that fair price
executions are currently available for
the highest volume, most liquid
domestic equity products, but not
necessarily for the majority of products
which are less actively traded.22 The
Exchange states that the use of the INAV
Pegged Order type would be entirely
optional, and is meant to offer an
additional tool to help investors achieve
greater transparency and a fair
execution price.23 The Exchange further
states its belief that for domestic equity
products, the published INAV is the
best proxy for fair value, as it represents
15 Id.
at 2.
16 Id.
17 See
Notice, supra note 4, at 64169.
18 Id.
19 See
ICI Letter, supra note 5, at 2.
The commenter notes that many ETF
sponsors and others have undertaken educational
efforts aimed at explaining order types for investors
and cites to www.understandETFs.org, a
collaborative effort by ETF providers to enhance
investor understanding of ETFs, as one example. Id.
21 Id.
22 See Response Letter, supra note 8, at 2.
23 Id.
20 Id.
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the closest calculation of underlying
value generally available.24
B. Concerns Regarding Investor
Understanding of INAV
The commenter states that its
members are concerned about the utility
of INAV as a reference point for pricing
an ETF order because market
participants may misunderstand
INAV.25 This commenter states that
INAV is not a ‘‘fair value’’ estimate of
the securities underlying the ETF, as
INAV is typically calculated using the
last sales price of the fund’s
components.26 The commenter states
that, at times, particularly for securities
that do not trade often, the last sale
price may not be reflective of the
security’s value, and unlike a fund’s
end-of-day net asset value, INAV does
not attempt to adjust for such
variations.27 Furthermore, the
commenter states that INAV is not a fair
value estimate of the ETF itself, as some
U.S. Component Stock ETFs may trade
at a consistent premium or discount,
which is not taken into account in the
INAV calculation.28 The commenter
states that where an ETF’s shares
frequently trade at a premium to INAV,
an INAV Pegged Order to sell at INAV
would likely disadvantage the seller.29
The commenter further states that,
although it recognizes that the proposed
order type could be used with an offset
to account for this premium, it is
concerned that market participants may
believe INAV represents the fair market
value of the ETF, and therefore reflects
such nuances.30
In response, the Exchange states its
belief that for domestic equity products
the INAV is a good representation of fair
value and the only representation of fair
value currently available for individual
investors.31 The Exchange disagrees
with the commenter that an INAV
Pegged Order to sell a U.S. Component
Stock ETF that trades at a consistent
premium would disadvantage the seller,
noting that in a scenario where an INAV
Pegged Order to sell was priced below
the best bid, it would only execute at
the best bid, which would be at a
premium to the INAV to the benefit of
the investor.32 The Exchange further
states that, more importantly, a buyer
utilizing the INAV Pegged Order type
would never execute at a premium to
INAV.33
The commenter also is concerned that
some market participants may not
understand that INAV can be an
inaccurate reflection of an ETF’s market
value because it can become stale over
the course of 15 seconds.34 The
commenter believes that establishing an
order price based on data that is nearly
15 seconds old could result in poor
execution.35
In response, the Exchange states that
the INAV Pegged Order type should
lead to a greater level of transparency as
it relates to the ETF’s current value and,
as a result, should increase investor
confidence.36 The Exchange states that
the INAV is the most up-to-date data
source that is publicly available, and ‘‘is
a clear improvement over the current
state of non-existent data as it relates to
real time fund valuation.’’ 37 The
Exchange states its belief that, although
the INAV is only updated every 15
seconds, it is still of value and
beneficial to investors as the execution
will still be benchmarked against the
prevailing published INAV.38 The
Exchange further states that if an
investor is uncomfortable with the
INAV Pegged Order functionality, they
would not be required to use the order
type.39
Further, the commenter also is
concerned that investors do not
understand that INAV calculations are
based on the ETF’s creation basket,
which in some cases does not include
all of the securities in a fund’s
portfolio.40 The commenter notes that in
such cases, ETF sponsors take great care
to publish baskets that mimic the
market characteristics of the full
portfolio, but there may be instances in
which the INAV, because it is based on
the constituents of a sampled basket,
deviates from the actual intra-day net
asset value of the ETF.41 The commenter
is concerned that investors who do not
understand how INAV is calculated for
a particular ETF may be unaware that
INAV does not always mirror the value
of the full portfolio, and such investors
might have chosen to submit a different
type of order had they understood the
limitations of INAV.42
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34 See
25 See
35 Id.
ICI Letter, supra note 5, at 3–4.
26 Id. at 4.
27 Id.
28 Id.
29 Id.
30 Id.
31 See Response Letter, supra note 8, at 2.
32 Id. at 3.
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36 See
ICI Letter, supra note 5, at 4.
Response Letter, supra note 8, at 3.
37 Id.
38 Id.
39 Id.
40 See
ICI Letter, supra note 5, at 4.
at 4–5.
42 Id. at 5.
41 Id.
PO 00000
C. Concerns Regarding INAV Error
The commenter also is concerned
about the susceptibility of INAV to
error.43 The commenter states that many
parties participate in the calculation,
publication, and dissemination of the
INAV (e.g., ETF sponsors, calculation
agents, exchanges, and/or third party
pricing vendors), that such a process
creates opportunities for errors,44 and
that such errors are not infrequent.45
The commenter states that ETF sponsors
attempt to monitor INAV and correct
such errors as soon as practicable, but
at times INAV Pegged Orders would
likely execute before these errors are
identified.46 This commenter further
argues that if calculation agents and
pricing vendors could be held liable by
investors using INAV Pegged Orders for
inaccuracies in INAVs, it is possible that
firms would cease providing such
services, making it impossible to
disseminate INAVs, or would charge
significantly more for their services,
resulting in increased expenses for ETF
investors.47
In its Response Letter, the Exchange
agrees with the commenter that an
erroneous INAV could be disseminated
by a calculation agent.48 However, the
Exchange states its belief that the risk of
a poor execution is mitigated by existing
general safeguards in the market place.49
The Exchange further states that an
execution pursuant to an INAV Pegged
Order would only ever occur within the
prevailing bid-offer spread, and that, in
the absence of adequate depth of
market, an aggrieved party could utilize
the Exchange’s existing clearly
erroneous procedures.50
D. Clarifications About the Operation of
the INAV Pegged Order
The commenter raises a number of
questions and requests clarifications
relating to how the INAV Pegged Order
would operate. First, the commenter
states that far more specificity is
necessary to explain how the Exchange
would suspend the use of and cancel
existing INAV Pegged Orders for an ETF
where the INAV data feed for such ETF
stops being disseminated or is
43 See
ICI Letter, supra note 5, at 3.
commenter provides as examples of such
errors that an ETF may report a basket inaccurately,
a calculation agent may receive faulty data from a
pricing vendor, or an error may be made in the
calculation process. Id. at 5.
45 Id. at 5.
46 Id.
47 Id.
48 See Response Letter, supra note 8, at 3.
49 Id.
50 Id.
44 The
33 Id.
24 Id.
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Federal Register / Vol. 78, No. 15 / Wednesday, January 23, 2013 / Notices
compromised.51 The commenter
believes that, most importantly, the
Exchange should clarify what
constitutes a ‘‘compromised’’ INAV, and
how the Exchange would identify a
compromised INAV and determine
whether to suspend new orders and
cancel existing ones.52 The commenter
also raises questions about the proposed
cancellation and suspension of INAV
Pegged Orders (e.g., how market
participants would be notified that their
orders have been cancelled due to a
problem with INAV calculation), as well
as about INAV Pegged Orders that may
be executed based on a flawed INAV
(e.g., whether such orders would be
cancellable). The commenter questions
the benefit of allowing or encouraging
the use of an order type that may be
subject to cancellation due to an
independent malfunction (such as an
erroneous data feed) even when the rest
of the market is performing normally.53
In response to these comments, the
Exchange clarifies in its Response Letter
that it would only suspend use of the
INAV Pegged Order type if it were to
detect a technological problem with the
relevant INAV data feed.54 The
Exchange represents that it currently
utilizes a number of systems and
processes aimed at detecting
dissemination or latency issues with
data feeds, and that it has processes in
place to communicate with market
participants in the event of technology
issues which impact its own systems or
those systems of a third party.55 The
Exchange states that it intends to utilize
its current processes in connection with
market communications relating to
issues with the INAV data feed.56 The
Exchange further states that it will
process clearly erroneous executions in
accordance with established policies.57
IV. Proceedings To Determine Whether
To Approve or Disapprove SR–
NASDAQ–2012–117 and Grounds for
Disapproval Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 58 to determine
whether the proposed rule change
should be approved or disapproved.
Institution of such proceedings is
appropriate at this time in view of the
significant legal and policy issues raised
by the proposed rule change, as
discussed below. Institution of
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51 See
ICI Letter, supra note 5, at 3.
52 Id.
53 Id.
54 See
Response Letter, supra note 8, at 2.
55 Id.
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, as described in
greater detail below, the Commission
seeks and encourages interested persons
to provide additional comment on the
proposed rule change.
Pursuant to Section 19(b)(2)(B) of the
Act,59 the Commission is providing
notice of the grounds for disapproval
under consideration. In particular,
Section 6(b)(5) of the Act 60 requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system and, in general, to protect
investors and the public interest.
As discussed above, the Exchange’s
proposal would amend NASDAQ Rule
4751(f)(4) to adopt a new INAV Pegged
Order type for U.S. Component Stock
ETFs. Pursuant to the proposal, an
INAV Pegged Order would specify that
its price will equal (or, to the extent an
offset is used, be offset from) the
prevailing INAV for the relevant U.S.
Component Stock ETF. Once entered,
the INAV Pegged Order would adjust in
price automatically in response to
changes in the INAV. 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 until such
time as the Exchange was confident that
the integrity of the INAV data feed had
been restored (i.e., no new INAV Pegged
Orders would be accepted into the
system and orders utilizing the INAV
Pegged Order functionality for that ETF
already in the system would be
cancelled).
The Commission solicits comment on
whether the proposal is consistent with
the Act and whether the Exchange has
met its burden in presenting a statutory
analysis of how its proposal is
consistent with the Act. In particular,
the grounds for disapproval under
consideration include whether the
Exchange’s proposal is consistent with
Section 6(b)(5) of the Act, which
requires, among other things, that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, and to protect investors and the
56 Id.
59 15
57 Id.
58 15
U.S.C. 78s(b)(2)(B).
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PO 00000
U.S.C. 78s(b)(2)(B).
U.S.C. 78f(b)(5).
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public interest.61 As discussed above,
one commenter has articulated a
number of questions and concerns
relating to the proposal. Among other
things, this commenter raises concerns
about investor confusion relating to
what the INAV represents and what it
does not represent; how INAV is
calculated; and the susceptibility of the
INAV to calculation errors.62 In
addition, the commenter requests more
specificity as to how the Exchange
would suspend the use of and cancel
existing INAV Pegged Orders for an ETF
where the INAV data feed for such ETF
stops being disseminated or is
compromised.63 Further, the commenter
is concerned that some market
participants may not understand that
INAV can be an inaccurate reflection of
an ETF’s market value because it can
become stale over the course of 15
seconds, and believes that establishing
an order price based on data that is
nearly 15 seconds old could result in
poor execution.64 As noted, the
published INAV of an ETF generally is
updated every 15 seconds, but the
actual INAV of an ETF could change
significantly during this same 15-second
period. This fact pattern could
potentially result in market participants’
INAV Pegged Orders being executed at
prices that do not reflect an up-to-date
INAV for the ETF. Investors who may
use the INAV Pegged Order type may
not understand this operational aspect
of the order type. Moreover, the 15second period could create
opportunities for participants with
access to real time calculations of the
INAV for an ETF to take advantage of
participants using the INAV Pegged
Order type that do not have the same
information. The Commission also
questions whether this proposed order
type could inherently be negatively
biased in that INAV Pegged Orders
likely would be executed when the
market is moving against the investor
(for example, an investor’s INAV Pegged
Order to buy would be executed only
when the market price of an ETF is
falling).
In its Response Letter, NASDAQ
argues that for U.S. Component Stock
ETFs, the published INAV represents
the closest and most up-to-date
calculation of underlying value
currently generally available, and is a
61 Id.
62 See
supra Section III.
id. The INAV is not a regulated
measurement or calculation and is not audited by
the Commission or any other regulatory or selfregulatory entity. Thus, it is unclear what party
would be responsible for the integrity and accuracy
of the INAV.
64 See id.
63 See
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good representation of fair value.65
NASDAQ further argues that the INAV
Pegged Order type will offer investors
an execution tool which should lead to
a greater level of transparency and result
in increased investor confidence.66 The
Exchange argues that the commenter’s
concerns about poor executions
resulting from erroneous or stale INAV
data are mitigated because, among other
things, the INAV Pegged Order type will
be entirely optional, an execution would
only ever occur within the prevailing
bid-offer spread, and the Exchange’s
existing clearly erroneous procedures
would be available to investors using
the INAV Pegged Order type.67
After careful consideration, the
Commission believes that the proposal
continues to raise a number of
questions, including those submitted by
the commenter, as to whether the use of
the proposed INAV Pegged Order type
is consistent with the protection of
investors and the public interest and
whether it is designed to promote just
and equitable principles of trade and
prevent fraudulent and manipulative
acts and practices. The Commission
continues to evaluate the issues
presented by the proposal and the
specific concerns articulated by the
commenter, and the Exchange’s
response.68 In light of these issues and
concerns, the Commission believes that
questions remain as to whether
NASDAQ’s proposal is consistent with
the requirements of Section 6(b)(5) of
the Act, including whether the proposal
is designed to prevent fraudulent and
manipulative acts and practices,
promote just and equitable principles of
trade, and protect investors and the
public interest.
V. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the concerns
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
proposal is consistent with Section
6(b)(5) 69 or any other provision of the
Act, or the rules and regulations
thereunder. Although there do not
appear to be any issues relevant to
approval or disapproval which would
be facilitated by an oral presentation of
65 See
Response Letter, supra note 8, at 2.
at 3.
67 Id. at 2–3.
68 See supra Section III.
69 15 U.S.C. 78f(b)(5).
66 Id.
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views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b–4, any request for an
opportunity to make an oral
presentation.70
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by February 13, 2013. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by February 27, 2013.
The Commission asks that
commenters address the sufficiency and
merit of the Exchange’s statements in
support of the proposal, including those
contained in the Response Letter, and
the statements of the commenter in
response to the proposal, in addition to
any other comments they may wish to
submit about the proposed rule change.
In particular, the Commission seeks
comment on the following:
1. The commenter states that market
participants may misunderstand INAV
as being the ‘‘fair value’’ estimate of the
securities underlying the ETF.71 In its
Response Letter, the Exchange states its
belief that for domestic equity products,
the INAV represents the best proxy for
fair value and the only representation of
fair value currently available for
individual investors, and is the most upto-date real time fund valuation data
source that is publicly available.72 What
are commenters’ views as to whether the
INAV represents a proxy for fair value
of the assets of an ETF? What are
commenters’ views as to whether
market participants could be confused
as to what INAV represents? Could
investors be confused that the INAV is
not the same as the end-of-day net asset
value of the ETF? Do market
participants currently utilize the
published INAV? If so, for what purpose
do commenters utilize the published
INAV? If not, why not?
2. The commenter further states that
the INAV calculations are based on the
ETF’s creation basket, which in some
cases do not represent all of the
securities in a fund’s portfolio; rather,
the INAV would reflect baskets that
mimic the market characteristics of the
70 Section 19(b)(2) of the Act, as amended by the
Securities Act Amendments of 1975, Public Law
94–29 (June 4, 1975), grants the Commission
flexibility to determine what type of proceeding—
either oral or notice and opportunity for written
comments—is appropriate for consideration of a
particular proposal by a self-regulatory
organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban
Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30
(1975).
71 See ICI Letter, supra note 5, at 4.
72 See Response Letter, supra note 8, at 2–3.
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4953
full portfolio.73 Do commenters agree
that investors who do not understand
how INAV is calculated for a particular
ETF may not understand that INAV
does not always mirror the value of the
full portfolio of such ETF? If not, why
not? Are there other aspects of the INAV
that commenters believe could
potentially cause confusion among
investors and other market participants,
particularly with respect to the
operation of the proposed INAV Pegged
Order? If so, what could they be?
3. The commenter states that market
participants may not understand that
the INAV can be an inaccurate reflection
of an ETF’s up-to-date market value. As
noted, the published INAV of an ETF
generally is updated every 15 seconds,
but the actual INAV of an ETF could
change significantly during this same
15-second period.74 Further, the
commenter states that the 15-second
period could create opportunities for
participants with access to real time
calculations of the INAV for an ETF to
take advantage of participants using the
INAV Pegged Order type that do not
have the same information.75 As a
result, the commenter asserts that
establishing an order price based on
data that is 15 seconds old could result
in poor executions.76
In response, the Exchange states its
belief that, although the INAV is only
updated every 15 seconds, it is still of
value and beneficial to investors as the
execution will still be benchmarked
against the prevailing published
INAV.77
Do commenters agree with the
concerns expressed by the commenter?
If so, why? If not, why not? For instance,
do commenters believe that the tying of
the execution of an INAV Pegged Order
to the published INAV, which is
updated every 15 seconds, could
potentially result in market participants’
INAV Pegged Orders being executed at
prices that do not reflect an up-to-date
INAV for the ETF? Are commenters
concerned that investors who may use
the INAV Pegged Order type may not
understand this operational aspect of
the order type?
4. The Exchange states that the INAV
Pegged Order type should lead to a
greater level of transparency as it relates
to the ETF’s current value and, as a
73 See
ICI Letter, supra note 5, at 5.
ICI Letter, supra note 5, at 4.
75 See id.
76 See id.
77 See Response Letter, supra note 8, at 3. The
Exchange states that the INAV is the most up-todate data source that is publicly available, and ‘‘is
a clear improvement over the current state of nonexistent data as it relates to real time fund
valuation.’’ Id.
74 See
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result, should increase investor
confidence.78 Do commenters agree
with these views? If so, why? If not, why
not? For example, how would use of the
proposed INAV Pegged Order type lead
to greater transparency as it relates to
the ETF’s current value?
5. The commenter states that the
calculation of INAV may be susceptible
to errors, based on, for example,
inaccurate reporting of ETF baskets,
faulty data from pricing vendors, or
errors in the calculation process.79
Further, the commenter asserts that
such errors are not infrequent.80 Do
commenters agree that INAV is
susceptible to calculation errors? If not,
why not? If so, how so? Do commenters
believe that a potential for errors in the
calculation of INAV could undermine
the purpose, design, and operation of
the proposed INAV Pegged Order type?
If so, how? If not, why not?
In its Response Letter, the Exchange
states its belief that the risk of a poor
execution due to an erroneous INAV is
mitigated by existing general safeguards
in the marketplace.81 Do commenters
agree with the Exchange? If so, what
safeguards exist that would mitigate
such a risk? If not, why not?
The Commission notes that the INAV
is not a regulated measurement or
calculation and is not audited by the
Commission or any other regulatory or
self-regulatory entity. Thus, it is unclear
what party would be responsible for the
integrity and accuracy of the INAV. Do
commenters believe that a lack of
accountability with respect to those
parties responsible for the calculation of
INAV could undermine the purpose,
design and operation of the INAV
Pegged Order? If not, why not?
6. In addition, the Commission
questions whether this proposed order
type could inherently be negatively
biased in that INAV Pegged Orders
likely would be executed when the
market is moving against the investor
(for example, an investor’s INAV Pegged
Order to buy would be executed only
when the market price of an ETF is
falling). Do commenters agree that the
INAV Pegged Order type could be
inherently biased to the detriment of the
investor? If not, why not? In its
Response Letter, the Exchange states
that an execution pursuant to an INAV
Pegged Order would only ever occur
within the prevailing bid-offer spread.82
Do commenters believe that this
mitigates concerns relating to whether
the INAV Pegged Order type could be
inherently biased to the detriment of
investors? Are there other potential risks
that the proposed INAV Pegged Order
type could pose to investors and other
market participants? If so, what could
they be?
7. The commenter requests more
specificity as to how the Exchange
would suspend the use of and cancel
existing INAV Pegged Orders for an ETF
where the INAV data feed for such ETF
stops being disseminated or is
‘‘compromised.’’ 83 The commenter also
raises questions about the proposed
cancellation and suspension of INAV
Pegged Orders (e.g., how market
participants would be notified that their
orders have been cancelled due to a
problem with INAV calculation), as well
as about INAV Pegged Orders that may
be executed based on a flawed INAV
(e.g., whether such orders would be
cancellable).84 In its Response Letter,
the Exchange clarifies that it would only
suspend the use of the INAV Pegged
Order type for a particular U.S.
Component Stock ETF if it were to
detect a technological problem with the
relevant INAV data feed, and that it
would utilize its current systems and
processes to detect any such problems
and to communicate to market
participants issues relating to the INAV
data feed.85 Do commenters believe the
Exchange has provided sufficient detail
with respect to when and how an INAV
Pegged Order would be suspended and
cancelled by the Exchange?
8. The commenter questions the
general purpose and benefit of an INAV
Pegged Order to market participants.86
In particular, the commenter states that
the use of limit orders generally could
address concerns relating to investors,
the vast majority of whom utilize market
orders and who, as a result, have been
subject to inferior executions.87 As such,
the commenter inquires as to whether
the benefits of the proposed INAV
Pegged Order type would outweigh the
potential risks.88 The Exchange states
the INAV Pegged Order type should
help investors achieve greater
transparency and a fair execution
price.89 Do commenters agree with the
Exchange’s assertion? If so, why? If not,
why not? What other benefits, if any, do
commenters believe would result from
the proposed INAV Pegged Order type?
What are commenters’ views as to how
83 See
ICI Letter, supra note 5, at 3.
84 Id.
78 See
85 See
79 See
id.
ICI Letter, supra note 5, at 5.
80 See id.
81 See Response Letter, supra note 8, at 2.
82 See Response Letter, supra note 8, at 3.
86 See
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Response Letter, supra note 8, at 2.
ICI Letter, supra note 5, at 2.
87 See id.
88 See id.
89 See Response Letter, supra note 8, at 2.
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potential benefits that they believe
would result from use of the proposed
INAV Pegged Order would compare to
the potential risks, as noted above?
Comments may be submitted by any
of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. 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 (https://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 February 13,
2013. Rebuttal comments should be
submitted by February 27, 2013.
90 17
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.90
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–01225 Filed 1–22–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68667; File No. SR–
NYSEArca-2012–109]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
Proposed Rule Change Relating to the
Listing and Trading of Shares of the
U.S. Equity High Volatility Put Write
Index Fund Under NYSE Arca Equities
Rule 5.2(j)(3)
January 16, 2013.
I. Introduction
On September 27, 2012, NYSE Arca,
Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’ or
‘‘Exchange Act’’) 1 and Rule 19b-4
thereunder,2 a proposed rule change to
list and trade shares (‘‘Shares’’) of the
U.S. Equity High Volatility Put Write
Index Fund (‘‘Fund’’) under NYSE Arca
Equities Rule 5.2(j)(3). The proposed
rule change was published in the
Federal Register on October 18, 2012.3
The Commission received no comments
on the proposal. On November 29, 2012,
pursuant to Section 19(b)(2) of the Act,4
the Commission designated a longer
period within which to either approve
the proposed rule change, disapprove
the proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change.5
This order grants approval of the
proposed rule change.
II. Description of the Proposal
The Exchange proposes to list and
trade the Shares of the Fund under
Commentary .01 to NYSE Arca Equities
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 68044
(October 12, 2012), 77 FR 64160 (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 Securities Exchange Act Release No. 68319
(November 29, 2012), 77 FR 72429 (December 5,
2012). The Commission determined that it was
appropriate to designate a longer period within
which to take action on the proposed rule change
so that it has sufficient time to consider the
proposed rule change. Accordingly, the
Commission designated January 16, 2013 as the
date by which it should approve, disapprove, or
institute proceedings to determine whether to
disapprove the proposed rule change.
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Rule 5.2(j)(3), which governs the listing
and trading of Investment Company
Units. The Shares will be issued by the
ALPS ETF Trust (‘‘Trust’’).6 ALPS
Advisors, Inc. will be the Fund’s
investment adviser (‘‘Adviser’’), and
Rich Investment Solutions, LLC will be
the Fund’s investment sub-adviser
(‘‘Sub-Adviser’’). The Adviser is
affiliated with a broker-dealer and will
implement and maintain procedures
designed to prevent the use and
dissemination of material, non-public
information regarding the Fund’s
portfolio. The Sub-Adviser is not
affiliated with a broker-dealer. In the
event (a) the Sub-Adviser becomes
newly affiliated with a broker-dealer, or
(b) any new adviser or sub-adviser
becomes affiliated with a broker-dealer,
it will implement and maintain
procedures designed to prevent the use
and dissemination of material, nonpublic information regarding the Fund’s
portfolio.
The Bank of New York Mellon
(‘‘BNY’’) will serve as custodian, fund
accounting agent, and transfer agent for
the Fund. ALPS Distributors, Inc. will
be the Fund’s distributor
(‘‘Distributor’’). NYSE Arca will be the
‘‘Index Provider’’ for the Fund. NYSE
Arca is not affiliated with the Trust, the
Adviser, the Sub-Adviser, or the
Distributor. NYSE Arca is affiliated with
a broker-dealer and will implement a
fire wall and maintain procedures
designed to prevent the use and
dissemination of material, non-public
information regarding the Index.
Description of the Fund
The Fund will seek investment results
that correspond generally to the
performance, before the Fund’s fees and
expenses, of the NYSE Arca U.S. Equity
High Volatility Put Write Index
(‘‘Index’’). The Index measures the
return of a hypothetical portfolio
consisting of U.S. exchange traded put
options which have been sold on each
of 20 stocks and a cash position
calculated as described below. The 20
stocks on which options are sold
(‘‘written’’) are those 20 stocks from a
selection of the largest capitalized (over
$5 billion in market capitalization)
stocks which also have listed options
and which have the highest volatility, as
6 The Trust is registered under the Investment
Company Act of 1940 (‘‘1940 Act’’). On May 3,
2012, the Trust filed with the Commission an
amendment to its registration statement on Form N–
1A (‘‘Registration Statement’’) under the Securities
Act of 1933 and under the 1940 Act relating to the
Fund (File Nos. 333–148826 and 811–22175). In
addition, the Commission has issued an order
granting certain exemptive relief to the Trust under
the 1940 Act. See Investment Company Act Release
No. 28262 (May 1, 2008) (File No. 812–13430).
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4955
determined by the Index Provider. The
Sub-Adviser will seek a correlation over
time of 0.95 or better between the
Fund’s performance and the
performance of the Index. A figure of
1.00 would represent perfect
correlation.
The Exchange submitted this
proposed rule change because the Index
for the Fund does not meet all of the
‘‘generic’’ listing requirements of
Commentary .01(a)(A) to NYSE Arca
Equities Rule 5.2(j)(3) applicable to the
listing of Investment Company Units
based upon an index of ‘‘US Component
Stocks.’’ 7 Specifically, Commentary
.01(a)(A) to NYSE Arca Equities Rule
5.2(j)(3) 8 sets forth the requirements to
be met by components of an index or
portfolio of US Component Stocks. As
described further below, the Index
consists of U.S. exchange-traded put
options. The Exchange has represented
that the Shares will conform to the
initial and continued listing criteria
under NYSE Arca Equities Rules
5.2(j)(3) and 5.5(g)(2), except that the
Index is comprised of put options,
which are not NMS Stocks as defined in
Rule 600 of Regulation NMS.
Index Methodology and Construction
The Index consists of at least 20
exchange-listed put options (‘‘Index
Components’’), selected in accordance
with NYSE Arca’s rules-based
methodology for the Index. In selecting
the stocks underlying the Index
Components, the Index Provider begins
with the universe of all U.S. exchangelisted stocks, and then screens for those
stocks that meet the following criteria:
(1) Minimum market capitalization of at
least $5 billion; (2) minimum trading
volume of at least 50 million shares
during the preceding 6 months; (3)
minimum average daily trading volume
of one million shares during the
preceding 6 months; (4) minimum
average daily trading value of at least
$10 million during the preceding 6
months; (5) share price of $10 or higher;
(6) the availability of U.S. exchangelisted options. The Index is
7 NYSE Arca Equities Rule 5.2(j)(3) provides that
the term ‘‘US Component Stock’’ shall mean an
equity security that is registered under Sections
12(b) or 12(g) of the Exchange Act or an American
Depositary Receipt, the underlying equity security
of which is registered under Sections 12(b) or 12(g)
of the Exchange Act.
8 Commentary .01(a)(A) to NYSE Arca Equities
Rule 5.2(j)(3) states, in relevant part, that the
components of an index of US Component Stocks,
upon the initial listing of a series of Investment
Company Units pursuant to Rule 19b–4(e) under
the Exchange Act, shall be NMS Stocks as defined
in Rule 600 of Regulation NMS under the Exchange
Act. See 17 CFR 242.600(b)(47) (defining ‘‘NMS
Stock’’ as any NMS Security other than an option).
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]]>Agencies
[Federal Register Volume 78, Number 15 (Wednesday, January 23, 2013)]
[Notices]
[Pages 4949-4955]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-01225]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68672; File No. SR-NASDAQ-2012-117 ]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove
Proposed Rule Change With Respect to INAV Pegged Orders for ETFs
January 16, 2013.
I. Introduction
On October 2, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend NASDAQ Rule 4751(f)(4) to adopt 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 NASDAQ Rule 5705(a)(1)(C) and
5705(b)(1)(D)) \3\ (``U.S. Component Stock ETFs''). The proposed rule
change was published for comment in the Federal Register on October 18,
2012.\4\ The Commission received one comment letter on the proposal.\5\
On November 21, 2012, pursuant to Section 19(b)(2) of the Act,\6\ the
Commission designated a longer period within which to either approve
the proposed rule change, disapprove the proposed rule change, or
institute proceedings to determine whether to disapprove the proposed
rule change.\7\ On January 15, 2013, the Commission received the
Exchange's response to the comment letter.\8\ This order institutes
proceedings under Section 19(b)(2)(B) of the Act \9\ to determine
whether to approve or disapprove the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Rule 5705 contains NASDAQ's listing standards for ETFs
(which include Portfolio Depositary Receipts and Index Fund Shares).
\4\ See Securities Exchange Act Release No. 68042 (October 12,
2012), 77 FR 64167 (``Notice'').
\5\ See Letter from Dorothy Donohue, Deputy General Counsel,
Investment Company Institute, to Elizabeth M. Murphy, Secretary,
Commission, dated November 8, 2012 (``ICI Letter'').
\6\ 15 U.S.C. 78s(b)(2).
\7\ See Securities Exchange Act Release No. 68279 (November 21,
2012), 77 FR 70857 (November 27, 2012). See also Securities Exchange
Act Release No. 68279A (December 4, 2012), 77 FR 73716 (December 11,
2012) (correcting certain typographical errors). The Commission
determined that it was appropriate to designate a longer period
within which to take action on the proposed rule change so that it
has sufficient time to consider the proposed rule change.
Accordingly, the Commission designated January 16, 2013 as the date
by which it should approve, disapprove, or institute proceedings to
determine whether to disapprove the proposed rule change.
\8\ See Letter from Stephen Matthews, Senior Associate General
Counsel, NASDAQ OMX, to Elizabeth M. Murphy, Secretary, Commission,
dated January 15, 2013 (``Response Letter'').
\9\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal
The Exchange proposes to amend NASDAQ Rule 4751(f)(4) to establish
INAV Pegged Orders that would be available only for U.S. Component
Stock ETFs. The INAV Pegged Order type would be available for all U.S.
Component Stock ETFs where there is dynamic INAV data. The INAV Pegged
Order would be priced relative to the INAV of the fund's underlying
portfolio. According to the Exchange, the INAV is intended to
approximate the fair value of the securities held in the portfolio by
an ETF,\10\ and the Exchange represents that the INAV should closely
represent the value of the fund during the trading
[[Page 4950]]
day.\11\ According to the Exchange, INAVs are typically calculated
using the last sale prices of the fund's components.\12\ The Exchange
represents that, pursuant to NASDAQ listing rules, the INAV for NASDAQ-
listed ETFs is disseminated widely to vendors and their subscribers via
multiple data feeds, including UTP Level 1, NASDAQ Basic, NASDAQ Level
2, and NASDAQ TotalView, and that INAVs are typically disseminated at
least once every 15 seconds during the regular market session.\13\
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\10\ The Exchange states that investors should note that the
INAV is only an estimation of a fund's value, and this might differ
from the end of day net asset value, which is more definitive and
disseminated on a daily basis at the end of the trading day. See
Notice, supra note 4, at 64169.
\11\ See Notice, supra note 4, at 64168. According to the
Exchange, the term ``INAV,'' as used by the Exchange in its
proposal, would be synonymous with commonly used terms such as
Intraday Indicative Value (IIV), Intraday Optimized Portfolio Value
(IOPV) and Intraday Portfolio Value (IPV), among others. Id.
\12\ The Exchange states that 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, among other things, the supply and
demand characteristics of the fund and/or liquidity present in the
marketplace. See Notice, supra note 4, at 64168. In addition, the
Exchange states that the INAV may remain unchanged for a certain
period of time if the underlying values do not change, particularly
in periods of low volatility, and that 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.
Id.
\13\ See id.
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Generally, Pegged Orders are orders that, once entered, adjust in
price automatically in response to changes in factors, such as the
national best bid or offer, depending upon the type of Pegged Order. An
INAV Pegged Order would 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, the INAV Pegged Orders would change
therewith. 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 Order 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.
A Pegged Order may have a limit price beyond which the order shall
not be executed. In addition, certain Pegged Orders (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. The
Exchange proposes to similarly introduce this functionality for the
INAV Pegged Order type. Moreover, similar to other Pegged Orders (other
than a Midpoint Peg Order), the Exchange proposes that an INAV Pegged
Order may be either displayed or non-displayed. If a market participant
utilizes the non-displayed order type, its order will be placed lower
in the priority queue than displayed orders within each price point.
The Exchange provides the following examples to illustrate how the
INAV Pegged Order type 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.
III. Summary of Comment Letters and the Exchange's Response
The Commission received one comment letter on the proposed rule
change.\14\ The commenter raises a number of concerns and requests a
number of clarifications relating to the proposal, each of which is
described below. The commenter notes that while it does not necessarily
object to the creation of a new order type pegged to INAV, it believes
the Commission should request additional information from the Exchange
to further explore the questions and concerns it raises, and consider
the benefits and risks of the proposed INAV Pegged Order, before
determining whether to approve it.\15\
---------------------------------------------------------------------------
\14\ See ICI Letter, supra note 5.
\15\ Id. at 2.
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A. Questions Regarding the Purpose and Benefits of the Proposal
First, the commenter states that its members have questioned the
purpose and benefit to market participants of an order type pegged to
INAV.\16\ The commenter notes that in its filing the Exchange states
that ``ETF Sponsors routinely deal with investors that have been
subject to inferior executions,'' \17\ and that the vast majority of
these complaints result from people using market orders where the
prevailing market price either does not correlate to the fund's value,
or the quoted size does not meet the demand of the order (or both).\18\
The commenter believes the use of limit orders generally addresses the
concerns highlighted by the Exchange, and that investor confusion
regarding order types likely explains the inopportune use of market
orders.\19\ The commenter further believes that educating investors on
the proper use of existing order types may be preferable to the
creation of another order type.\20\ Moreover, the commenter states that
the problems with execution typically occur in ETFs that would not be
covered by the new order type, i.e., those based on fixed income and
non-US equity securities, and that most ETFs comprised of U.S. equities
are very liquid and trade with fair price execution.\21\
---------------------------------------------------------------------------
\16\ Id.
\17\ See Notice, supra note 4, at 64169.
\18\ Id.
\19\ See ICI Letter, supra note 5, at 2.
\20\ Id. The commenter notes that many ETF sponsors and others
have undertaken educational efforts aimed at explaining order types
for investors and cites to www.understandETFs.org, a collaborative
effort by ETF providers to enhance investor understanding of ETFs,
as one example. Id.
\21\ Id.
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In response to these comments, the Exchange states its belief that
fair price executions are currently available for the highest volume,
most liquid domestic equity products, but not necessarily for the
majority of products which are less actively traded.\22\ The Exchange
states that the use of the INAV Pegged Order type would be entirely
optional, and is meant to offer an additional tool to help investors
achieve greater transparency and a fair execution price.\23\ The
Exchange further states its belief that for domestic equity products,
the published INAV is the best proxy for fair value, as it represents
[[Page 4951]]
the closest calculation of underlying value generally available.\24\
---------------------------------------------------------------------------
\22\ See Response Letter, supra note 8, at 2.
\23\ Id.
\24\ Id.
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B. Concerns Regarding Investor Understanding of INAV
The commenter states that its members are concerned about the
utility of INAV as a reference point for pricing an ETF order because
market participants may misunderstand INAV.\25\ This commenter states
that INAV is not a ``fair value'' estimate of the securities underlying
the ETF, as INAV is typically calculated using the last sales price of
the fund's components.\26\ The commenter states that, at times,
particularly for securities that do not trade often, the last sale
price may not be reflective of the security's value, and unlike a
fund's end-of-day net asset value, INAV does not attempt to adjust for
such variations.\27\ Furthermore, the commenter states that INAV is not
a fair value estimate of the ETF itself, as some U.S. Component Stock
ETFs may trade at a consistent premium or discount, which is not taken
into account in the INAV calculation.\28\ The commenter states that
where an ETF's shares frequently trade at a premium to INAV, an INAV
Pegged Order to sell at INAV would likely disadvantage the seller.\29\
The commenter further states that, although it recognizes that the
proposed order type could be used with an offset to account for this
premium, it is concerned that market participants may believe INAV
represents the fair market value of the ETF, and therefore reflects
such nuances.\30\
---------------------------------------------------------------------------
\25\ See ICI Letter, supra note 5, at 3-4.
\26\ Id. at 4.
\27\ Id.
\28\ Id.
\29\ Id.
\30\ Id.
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In response, the Exchange states its belief that for domestic
equity products the INAV is a good representation of fair value and the
only representation of fair value currently available for individual
investors.\31\ The Exchange disagrees with the commenter that an INAV
Pegged Order to sell a U.S. Component Stock ETF that trades at a
consistent premium would disadvantage the seller, noting that in a
scenario where an INAV Pegged Order to sell was priced below the best
bid, it would only execute at the best bid, which would be at a premium
to the INAV to the benefit of the investor.\32\ The Exchange further
states that, more importantly, a buyer utilizing the INAV Pegged Order
type would never execute at a premium to INAV.\33\
---------------------------------------------------------------------------
\31\ See Response Letter, supra note 8, at 2.
\32\ Id. at 3.
\33\ Id.
---------------------------------------------------------------------------
The commenter also is concerned that some market participants may
not understand that INAV can be an inaccurate reflection of an ETF's
market value because it can become stale over the course of 15
seconds.\34\ The commenter believes that establishing an order price
based on data that is nearly 15 seconds old could result in poor
execution.\35\
---------------------------------------------------------------------------
\34\ See ICI Letter, supra note 5, at 4.
\35\ Id.
---------------------------------------------------------------------------
In response, the Exchange states that the INAV Pegged Order type
should lead to a greater level of transparency as it relates to the
ETF's current value and, as a result, should increase investor
confidence.\36\ The Exchange states that the INAV is the most up-to-
date data source that is publicly available, and ``is a clear
improvement over the current state of non-existent data as it relates
to real time fund valuation.'' \37\ The Exchange states its belief
that, although the INAV is only updated every 15 seconds, it is still
of value and beneficial to investors as the execution will still be
benchmarked against the prevailing published INAV.\38\ The Exchange
further states that if an investor is uncomfortable with the INAV
Pegged Order functionality, they would not be required to use the order
type.\39\
---------------------------------------------------------------------------
\36\ See Response Letter, supra note 8, at 3.
\37\ Id.
\38\ Id.
\39\ Id.
---------------------------------------------------------------------------
Further, the commenter also is concerned that investors do not
understand that INAV calculations are based on the ETF's creation
basket, which in some cases does not include all of the securities in a
fund's portfolio.\40\ The commenter notes that in such cases, ETF
sponsors take great care to publish baskets that mimic the market
characteristics of the full portfolio, but there may be instances in
which the INAV, because it is based on the constituents of a sampled
basket, deviates from the actual intra-day net asset value of the
ETF.\41\ The commenter is concerned that investors who do not
understand how INAV is calculated for a particular ETF may be unaware
that INAV does not always mirror the value of the full portfolio, and
such investors might have chosen to submit a different type of order
had they understood the limitations of INAV.\42\
---------------------------------------------------------------------------
\40\ See ICI Letter, supra note 5, at 4.
\41\ Id. at 4-5.
\42\ Id. at 5.
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C. Concerns Regarding INAV Error
The commenter also is concerned about the susceptibility of INAV to
error.\43\ The commenter states that many parties participate in the
calculation, publication, and dissemination of the INAV (e.g., ETF
sponsors, calculation agents, exchanges, and/or third party pricing
vendors), that such a process creates opportunities for errors,\44\ and
that such errors are not infrequent.\45\ The commenter states that ETF
sponsors attempt to monitor INAV and correct such errors as soon as
practicable, but at times INAV Pegged Orders would likely execute
before these errors are identified.\46\ This commenter further argues
that if calculation agents and pricing vendors could be held liable by
investors using INAV Pegged Orders for inaccuracies in INAVs, it is
possible that firms would cease providing such services, making it
impossible to disseminate INAVs, or would charge significantly more for
their services, resulting in increased expenses for ETF investors.\47\
---------------------------------------------------------------------------
\43\ See ICI Letter, supra note 5, at 3.
\44\ The commenter provides as examples of such errors that an
ETF may report a basket inaccurately, a calculation agent may
receive faulty data from a pricing vendor, or an error may be made
in the calculation process. Id. at 5.
\45\ Id. at 5.
\46\ Id.
\47\ Id.
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In its Response Letter, the Exchange agrees with the commenter that
an erroneous INAV could be disseminated by a calculation agent.\48\
However, the Exchange states its belief that the risk of a poor
execution is mitigated by existing general safeguards in the market
place.\49\ The Exchange further states that an execution pursuant to an
INAV Pegged Order would only ever occur within the prevailing bid-offer
spread, and that, in the absence of adequate depth of market, an
aggrieved party could utilize the Exchange's existing clearly erroneous
procedures.\50\
---------------------------------------------------------------------------
\48\ See Response Letter, supra note 8, at 3.
\49\ Id.
\50\ Id.
---------------------------------------------------------------------------
D. Clarifications About the Operation of the INAV Pegged Order
The commenter raises a number of questions and requests
clarifications relating to how the INAV Pegged Order would operate.
First, the commenter states that far more specificity is necessary to
explain how the Exchange would suspend the use of and cancel existing
INAV Pegged Orders for an ETF where the INAV data feed for such ETF
stops being disseminated or is
[[Page 4952]]
compromised.\51\ The commenter believes that, most importantly, the
Exchange should clarify what constitutes a ``compromised'' INAV, and
how the Exchange would identify a compromised INAV and determine
whether to suspend new orders and cancel existing ones.\52\ The
commenter also raises questions about the proposed cancellation and
suspension of INAV Pegged Orders (e.g., how market participants would
be notified that their orders have been cancelled due to a problem with
INAV calculation), as well as about INAV Pegged Orders that may be
executed based on a flawed INAV (e.g., whether such orders would be
cancellable). The commenter questions the benefit of allowing or
encouraging the use of an order type that may be subject to
cancellation due to an independent malfunction (such as an erroneous
data feed) even when the rest of the market is performing normally.\53\
---------------------------------------------------------------------------
\51\ See ICI Letter, supra note 5, at 3.
\52\ Id.
\53\ Id.
---------------------------------------------------------------------------
In response to these comments, the Exchange clarifies in its
Response Letter that it would only suspend use of the INAV Pegged Order
type if it were to detect a technological problem with the relevant
INAV data feed.\54\ The Exchange represents that it currently utilizes
a number of systems and processes aimed at detecting dissemination or
latency issues with data feeds, and that it has processes in place to
communicate with market participants in the event of technology issues
which impact its own systems or those systems of a third party.\55\ The
Exchange states that it intends to utilize its current processes in
connection with market communications relating to issues with the INAV
data feed.\56\ The Exchange further states that it will process clearly
erroneous executions in accordance with established policies.\57\
---------------------------------------------------------------------------
\54\ See Response Letter, supra note 8, at 2.
\55\ Id.
\56\ Id.
\57\ Id.
---------------------------------------------------------------------------
IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2012-117 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \58\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the significant
legal and policy issues raised by the proposed rule change, as
discussed below. Institution of proceedings does not indicate that the
Commission has reached any conclusions with respect to any of the
issues involved. Rather, as described in greater detail below, the
Commission seeks and encourages interested persons to provide
additional comment on the proposed rule change.
---------------------------------------------------------------------------
\58\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Act,\59\ the Commission is
providing notice of the grounds for disapproval under consideration. In
particular, Section 6(b)(5) of the Act \60\ requires, among other
things, that the rules of a national securities exchange be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\59\ 15 U.S.C. 78s(b)(2)(B).
\60\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As discussed above, the Exchange's proposal would amend NASDAQ Rule
4751(f)(4) to adopt a new INAV Pegged Order type for U.S. Component
Stock ETFs. Pursuant to the proposal, an INAV Pegged Order would
specify that its price will equal (or, to the extent an offset is used,
be offset from) the prevailing INAV for the relevant U.S. Component
Stock ETF. Once entered, the INAV Pegged Order would adjust in price
automatically in response to changes in the INAV. 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 until such time as the
Exchange was confident that the integrity of the INAV data feed had
been restored (i.e., no new INAV Pegged Orders would be accepted into
the system and orders utilizing the INAV Pegged Order functionality for
that ETF already in the system would be cancelled).
The Commission solicits comment on whether the proposal is
consistent with the Act and whether the Exchange has met its burden in
presenting a statutory analysis of how its proposal is consistent with
the Act. In particular, the grounds for disapproval under consideration
include whether the Exchange's proposal is consistent with Section
6(b)(5) of the Act, which requires, among other things, that the rules
of a national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and to protect investors and the public
interest.\61\ As discussed above, one commenter has articulated a
number of questions and concerns relating to the proposal. Among other
things, this commenter raises concerns about investor confusion
relating to what the INAV represents and what it does not represent;
how INAV is calculated; and the susceptibility of the INAV to
calculation errors.\62\ In addition, the commenter requests more
specificity as to how the Exchange would suspend the use of and cancel
existing INAV Pegged Orders for an ETF where the INAV data feed for
such ETF stops being disseminated or is compromised.\63\ Further, the
commenter is concerned that some market participants may not understand
that INAV can be an inaccurate reflection of an ETF's market value
because it can become stale over the course of 15 seconds, and believes
that establishing an order price based on data that is nearly 15
seconds old could result in poor execution.\64\ As noted, the published
INAV of an ETF generally is updated every 15 seconds, but the actual
INAV of an ETF could change significantly during this same 15-second
period. This fact pattern could potentially result in market
participants' INAV Pegged Orders being executed at prices that do not
reflect an up-to-date INAV for the ETF. Investors who may use the INAV
Pegged Order type may not understand this operational aspect of the
order type. Moreover, the 15-second period could create opportunities
for participants with access to real time calculations of the INAV for
an ETF to take advantage of participants using the INAV Pegged Order
type that do not have the same information. The Commission also
questions whether this proposed order type could inherently be
negatively biased in that INAV Pegged Orders likely would be executed
when the market is moving against the investor (for example, an
investor's INAV Pegged Order to buy would be executed only when the
market price of an ETF is falling).
---------------------------------------------------------------------------
\61\ Id.
\62\ See supra Section III.
\63\ See id. The INAV is not a regulated measurement or
calculation and is not audited by the Commission or any other
regulatory or self-regulatory entity. Thus, it is unclear what party
would be responsible for the integrity and accuracy of the INAV.
\64\ See id.
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In its Response Letter, NASDAQ argues that for U.S. Component Stock
ETFs, the published INAV represents the closest and most up-to-date
calculation of underlying value currently generally available, and is a
[[Page 4953]]
good representation of fair value.\65\ NASDAQ further argues that the
INAV Pegged Order type will offer investors an execution tool which
should lead to a greater level of transparency and result in increased
investor confidence.\66\ The Exchange argues that the commenter's
concerns about poor executions resulting from erroneous or stale INAV
data are mitigated because, among other things, the INAV Pegged Order
type will be entirely optional, an execution would only ever occur
within the prevailing bid-offer spread, and the Exchange's existing
clearly erroneous procedures would be available to investors using the
INAV Pegged Order type.\67\
---------------------------------------------------------------------------
\65\ See Response Letter, supra note 8, at 2.
\66\ Id. at 3.
\67\ Id. at 2-3.
---------------------------------------------------------------------------
After careful consideration, the Commission believes that the
proposal continues to raise a number of questions, including those
submitted by the commenter, as to whether the use of the proposed INAV
Pegged Order type is consistent with the protection of investors and
the public interest and whether it is designed to promote just and
equitable principles of trade and prevent fraudulent and manipulative
acts and practices. The Commission continues to evaluate the issues
presented by the proposal and the specific concerns articulated by the
commenter, and the Exchange's response.\68\ In light of these issues
and concerns, the Commission believes that questions remain as to
whether NASDAQ's proposal is consistent with the requirements of
Section 6(b)(5) of the Act, including whether the proposal is designed
to prevent fraudulent and manipulative acts and practices, promote just
and equitable principles of trade, and protect investors and the public
interest.
---------------------------------------------------------------------------
\68\ See supra Section III.
---------------------------------------------------------------------------
V. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
concerns identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) \69\ or any other provision of the Act,
or the rules and regulations thereunder. Although there do not appear
to be any issues relevant to approval or disapproval which would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\70\
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\69\ 15 U.S.C. 78f(b)(5).
\70\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by February 13, 2013. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
February 27, 2013.
The Commission asks that commenters address the sufficiency and
merit of the Exchange's statements in support of the proposal,
including those contained in the Response Letter, and the statements of
the commenter in response to the proposal, in addition to any other
comments they may wish to submit about the proposed rule change. In
particular, the Commission seeks comment on the following:
1. The commenter states that market participants may misunderstand
INAV as being the ``fair value'' estimate of the securities underlying
the ETF.\71\ In its Response Letter, the Exchange states its belief
that for domestic equity products, the INAV represents the best proxy
for fair value and the only representation of fair value currently
available for individual investors, and is the most up-to-date real
time fund valuation data source that is publicly available.\72\ What
are commenters' views as to whether the INAV represents a proxy for
fair value of the assets of an ETF? What are commenters' views as to
whether market participants could be confused as to what INAV
represents? Could investors be confused that the INAV is not the same
as the end-of-day net asset value of the ETF? Do market participants
currently utilize the published INAV? If so, for what purpose do
commenters utilize the published INAV? If not, why not?
---------------------------------------------------------------------------
\71\ See ICI Letter, supra note 5, at 4.
\72\ See Response Letter, supra note 8, at 2-3.
---------------------------------------------------------------------------
2. The commenter further states that the INAV calculations are
based on the ETF's creation basket, which in some cases do not
represent all of the securities in a fund's portfolio; rather, the INAV
would reflect baskets that mimic the market characteristics of the full
portfolio.\73\ Do commenters agree that investors who do not understand
how INAV is calculated for a particular ETF may not understand that
INAV does not always mirror the value of the full portfolio of such
ETF? If not, why not? Are there other aspects of the INAV that
commenters believe could potentially cause confusion among investors
and other market participants, particularly with respect to the
operation of the proposed INAV Pegged Order? If so, what could they be?
---------------------------------------------------------------------------
\73\ See ICI Letter, supra note 5, at 5.
---------------------------------------------------------------------------
3. The commenter states that market participants may not understand
that the INAV can be an inaccurate reflection of an ETF's up-to-date
market value. As noted, the published INAV of an ETF generally is
updated every 15 seconds, but the actual INAV of an ETF could change
significantly during this same 15-second period.\74\ Further, the
commenter states that the 15-second period could create opportunities
for participants with access to real time calculations of the INAV for
an ETF to take advantage of participants using the INAV Pegged Order
type that do not have the same information.\75\ As a result, the
commenter asserts that establishing an order price based on data that
is 15 seconds old could result in poor executions.\76\
---------------------------------------------------------------------------
\74\ See ICI Letter, supra note 5, at 4.
\75\ See id.
\76\ See id.
---------------------------------------------------------------------------
In response, the Exchange states its belief that, although the INAV
is only updated every 15 seconds, it is still of value and beneficial
to investors as the execution will still be benchmarked against the
prevailing published INAV.\77\
---------------------------------------------------------------------------
\77\ See Response Letter, supra note 8, at 3. The Exchange
states that the INAV is the most up-to-date data source that is
publicly available, and ``is a clear improvement over the current
state of non-existent data as it relates to real time fund
valuation.'' Id.
---------------------------------------------------------------------------
Do commenters agree with the concerns expressed by the commenter?
If so, why? If not, why not? For instance, do commenters believe that
the tying of the execution of an INAV Pegged Order to the published
INAV, which is updated every 15 seconds, could potentially result in
market participants' INAV Pegged Orders being executed at prices that
do not reflect an up-to-date INAV for the ETF? Are commenters concerned
that investors who may use the INAV Pegged Order type may not
understand this operational aspect of the order type?
4. The Exchange states that the INAV Pegged Order type should lead
to a greater level of transparency as it relates to the ETF's current
value and, as a
[[Page 4954]]
result, should increase investor confidence.\78\ Do commenters agree
with these views? If so, why? If not, why not? For example, how would
use of the proposed INAV Pegged Order type lead to greater transparency
as it relates to the ETF's current value?
---------------------------------------------------------------------------
\78\ See id.
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5. The commenter states that the calculation of INAV may be
susceptible to errors, based on, for example, inaccurate reporting of
ETF baskets, faulty data from pricing vendors, or errors in the
calculation process.\79\ Further, the commenter asserts that such
errors are not infrequent.\80\ Do commenters agree that INAV is
susceptible to calculation errors? If not, why not? If so, how so? Do
commenters believe that a potential for errors in the calculation of
INAV could undermine the purpose, design, and operation of the proposed
INAV Pegged Order type? If so, how? If not, why not?
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\79\ See ICI Letter, supra note 5, at 5.
\80\ See id.
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In its Response Letter, the Exchange states its belief that the
risk of a poor execution due to an erroneous INAV is mitigated by
existing general safeguards in the marketplace.\81\ Do commenters agree
with the Exchange? If so, what safeguards exist that would mitigate
such a risk? If not, why not?
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\81\ See Response Letter, supra note 8, at 2.
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The Commission notes that the INAV is not a regulated measurement
or calculation and is not audited by the Commission or any other
regulatory or self-regulatory entity. Thus, it is unclear what party
would be responsible for the integrity and accuracy of the INAV. Do
commenters believe that a lack of accountability with respect to those
parties responsible for the calculation of INAV could undermine the
purpose, design and operation of the INAV Pegged Order? If not, why
not?
6. In addition, the Commission questions whether this proposed
order type could inherently be negatively biased in that INAV Pegged
Orders likely would be executed when the market is moving against the
investor (for example, an investor's INAV Pegged Order to buy would be
executed only when the market price of an ETF is falling). Do
commenters agree that the INAV Pegged Order type could be inherently
biased to the detriment of the investor? If not, why not? In its
Response Letter, the Exchange states that an execution pursuant to an
INAV Pegged Order would only ever occur within the prevailing bid-offer
spread.\82\ Do commenters believe that this mitigates concerns relating
to whether the INAV Pegged Order type could be inherently biased to the
detriment of investors? Are there other potential risks that the
proposed INAV Pegged Order type could pose to investors and other
market participants? If so, what could they be?
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\82\ See Response Letter, supra note 8, at 3.
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7. The commenter requests more specificity as to how the Exchange
would suspend the use of and cancel existing INAV Pegged Orders for an
ETF where the INAV data feed for such ETF stops being disseminated or
is ``compromised.'' \83\ The commenter also raises questions about the
proposed cancellation and suspension of INAV Pegged Orders (e.g., how
market participants would be notified that their orders have been
cancelled due to a problem with INAV calculation), as well as about
INAV Pegged Orders that may be executed based on a flawed INAV (e.g.,
whether such orders would be cancellable).\84\ In its Response Letter,
the Exchange clarifies that it would only suspend the use of the INAV
Pegged Order type for a particular U.S. Component Stock ETF if it were
to detect a technological problem with the relevant INAV data feed, and
that it would utilize its current systems and processes to detect any
such problems and to communicate to market participants issues relating
to the INAV data feed.\85\ Do commenters believe the Exchange has
provided sufficient detail with respect to when and how an INAV Pegged
Order would be suspended and cancelled by the Exchange?
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\83\ See ICI Letter, supra note 5, at 3.
\84\ Id.
\85\ See Response Letter, supra note 8, at 2.
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8. The commenter questions the general purpose and benefit of an
INAV Pegged Order to market participants.\86\ In particular, the
commenter states that the use of limit orders generally could address
concerns relating to investors, the vast majority of whom utilize
market orders and who, as a result, have been subject to inferior
executions.\87\ As such, the commenter inquires as to whether the
benefits of the proposed INAV Pegged Order type would outweigh the
potential risks.\88\ The Exchange states the INAV Pegged Order type
should help investors achieve greater transparency and a fair execution
price.\89\ Do commenters agree with the Exchange's assertion? If so,
why? If not, why not? What other benefits, if any, do commenters
believe would result from the proposed INAV Pegged Order type? What are
commenters' views as to how potential benefits that they believe would
result from use of the proposed INAV Pegged Order would compare to the
potential risks, as noted above?
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\86\ See ICI Letter, supra note 5, at 2.
\87\ See id.
\88\ See id.
\89\ See Response Letter, supra note 8, at 2.
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Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. 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 (https://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 February 13, 2013. Rebuttal comments should
be submitted by February 27, 2013.
[[Page 4955]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\90\
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\90\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01225 Filed 1-22-13; 8:45 am]
BILLING CODE 8011-01-P
