
[Federal Register Volume 77, Number 202 (Thursday, October 18, 2012)]
[Notices]
[Pages 64167-64170]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25600]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68042; File No. SR-NASDAQ-2012-117]


 Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change With Respect to INAV Pegged 
Orders for ETFs

October 12, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on October 2, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to amend Rule 4751(f)(4) to include a new Intraday 
Net Asset Value (``INAV'') Pegged Order for Exchange-Traded Funds 
(``ETFs'') where the component stocks underlying the ETFs are U.S. 
Component Stocks as defined by Rule 5705(a)(1)(C) and 5705(b)(1)(D)--
hereafter defined as ``U.S. Component Stock ETFs.''
    The text of the proposed rule change is set forth below. Proposed 
new text is in italics and deleted text is in brackets.

4751. Definitions

    The following definitions apply to the Rule 4600 and 4750 Series 
for the trading of securities listed on Nasdaq or a national securities 
exchange other than Nasdaq.
    (a)-(e) No change.
    (f) The term ``Order Type'' shall mean the unique processing 
prescribed for

[[Page 64168]]

designated orders that are eligible for entry into the System, and 
shall include:
    (1)-(3) No change.
    (4) ``Pegged Orders'' are orders that, after entry, have their 
price automatically adjusted by the System in response to changes in 
either the Nasdaq Market Center inside bid or offer, [or] bids or 
offers in the national market system, or in respect of Exchange Traded 
Funds of U.S. Component Stocks (as defined in Rule 5705), changes in 
the intraday net asset value (``INAV''), as appropriate. A Pegged Order 
can specify that its price will equal the inside quote on the same side 
of the market (``Primary Peg''), the opposite side of the market 
(``Market Peg''), or the midpoint of the national best bid and offer 
(``Midpoint Peg'') or, in the case of Exchange Traded Funds of U.S. 
Component Stocks, the INAV (``INAV Peg''). A Pegged Order may have a 
limit price beyond which the order shall not be executed. In addition, 
the Primary Peg, [and] Market Peg and INAV Peg Orders may also 
establish their pricing relative to the appropriate bids, [or] offers 
or INAV by the selection of one or more offset amounts that will adjust 
the price of the order by the offset amount selected. A Midpoint Peg 
Order is priced based upon the national best bid and offer, excluding 
the effect that the Midpoint Peg Order itself has on the inside bid or 
inside offer. Midpoint Pegged Orders will never be displayed. A 
Midpoint Pegged Order may be executed in sub-pennies if necessary to 
obtain a midpoint price. A new timestamp is created for the order each 
time it is automatically adjusted.
    (5)-(15) No change.
    (g)-(i) No change.
* * * * *
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NASDAQ proposes to amend Rule 4751(f)(4) to establish INAV Pegged 
Orders which will be available for U.S. Component Stock ETFs. This new 
order type will serve market participants that utilize these ETFs as a 
vehicle to invest or trade in addition to serving the needs and 
interests of the Sponsors/Issuers of ETFs.
    The ETF INAV Pegged Order will be priced relative to the Intraday 
Net Asset Value of the fund's underlying portfolio. The term ``INAV'' 
is synonymous with commonly used terms such as Intraday Indicative 
Value (IIV), Intraday Optimized Portfolio Value (IOPV) and Intraday 
Portfolio Value (IPV) amongst others. The INAV is intended to 
approximate the fair value of the securities held in the portfolio by 
the ETF and should closely represent the value of the fund during the 
trading day. Pursuant to NASDAQ listing rules, the INAV for NASDAQ-
listed stocks is disseminated widely to vendors and their subscribers 
via multiple data feeds, including UTP Level 1, NASDAQ Basic, NASDAQ 
Level 2, and NASDAQ TotalView. INAVs are typically disseminated at 
least once every 15 seconds. Rule 5705(a)(3)(C), for example, requires 
that the IIV for NASDAQ listed portfolio depository receipts be 
disseminated at least every 15 seconds.
    Typically, INAVs are calculated using the last sale prices of the 
fund's components. INAVs can vary from the fund's market price and/or 
can be valued outside of the fund's prevailing bid/ask spread as a 
result of the supply and demand characteristics of the fund and/or 
liquidity present in the marketplace. The INAV may remain unchanged for 
a certain period of time if the underlying values do not change, 
particularly in periods of low volatility. Additionally, the INAV may 
become stale as a result of a compromised data feed or disruption to 
the calculation and/or dissemination agent or other technology related 
malfunction.
    The fair market price of an ETF is more objective than the market 
price of a cash equity. Mainly, the price of an ETF is based upon the 
price of the underlying portfolio of the ETF. Therefore, if the 
components of the portfolio increase in value, so does the fund and, 
conversely, if the components of the portfolio decrease in value, so 
does the fund. In the cash equities marketplace, pricing is more 
subjective in nature. Unfavorable executions occur in the ETF 
marketplace and this can be as a result of market participants not 
recognizing the liquidity characteristics of the product they are 
trading. Executions can occur with drastic variance from the INAV, 
usually as a result of participants relying on market orders for 
execution. The INAV Pegged Order type will be available for all U.S. 
Component Stock ETFs where there is dynamic INAV data and will offer 
market participants a greater level of transparency as to fair value, 
by bringing what has historically been a post-trade analytics tool into 
the pre-trade environment. More importantly, the INAV Pegged Order 
should minimize the disparity between the market execution price and 
the underlying fund's value.
    Pegged Orders are orders that, once entered, adjust in price 
automatically in response to changes in factors such as the NBBO, 
depending upon the type of Pegged Order. An INAV Pegged Order will 
specify that its price will equal (or, to the extent an offset is used, 
be offset from) the prevailing INAV for the relevant ETF. As the INAV 
changes, so move the INAV Pegged Orders. In the event that the INAV 
data feed for a particular ETF were to be compromised or temporarily 
stopped being disseminated, the use of the INAV Pegged Order type for 
that ETF would be suspended (i.e., no new INAV Pegged Orders would be 
accepted into the system) and orders utilizing the INAV pegged 
functionality for that ETF already in the system would be cancelled. 
The suspension of new INAV Pegged Orders would remain in effect until 
such time as the Exchange was confident that the integrity of the INAV 
data feed had been restored.
    The proposed rule change is in accordance with Rule 612 of 
Regulation NMS,\3\ which governs sub-penny quoting of National Market 
System stocks (``Sub-Penny Rule''). The proposed rule change would not 
result in the display, rank, or acceptance of a bid or offer, an order, 
quotation, or indication of interest in any NMS stock that is priced in 
an increment smaller than $0.01 per share, unless the price of the bid 
or offer, order, indication of interest is priced less than $1.00 per 
share.
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    \3\ 17 CFR 242.600 et seq. See also Securities Exchange Act 
Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) 
(``Regulation NMS Adopting Release'').
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    NASDAQ intends to use an INAV as opposed to the end of day net 
asset value (``ED NAV'') for a number of reasons. While the ED NAV is 
more

[[Page 64169]]

definitive in nature, it does not allow for an intraday fund valuation, 
thus limiting one of the greatest advantages of the ETF structure, 
mainly the ability to trade throughout the entire trading session, as 
compared to the traditional Mutual Fund (which uses ED NAV based 
execution). Conversely, use of the INAV, while only indicative of the 
ETF's value, offers investors a trade execution tool which should lead 
to a greater level of transparency as it relates to the ETF's current 
value. Relative to the current intraday order entry/execution order 
types, the INAV Pegged Order type would allow certainty of execution 
with a greater correlation to the ETF's fair value for those seeking to 
invest on a more informed basis. However, despite NASDAQ's rationale 
for using the INAV, investors should note that the INAV is only an 
estimation of a fund's value, and this might differ from the ED NAV 
which is more definitive and disseminated on a daily basis at the end 
of the trading day. Investors should also note that INAVs are only 
calculated and disseminated during the regular market session.
    A Pegged Order may have a limit price beyond which the order shall 
not be executed. Currently, Primary Peg and Market Peg Orders may 
establish their pricing relative to the appropriate bids or offers by 
selecting one or more offset amounts that will adjust the price of the 
order by the offset amount selected. We propose to introduce this 
functionality for the INAV Peg also.
    A Pegged Order (other than a Midpoint Peg Order) may be both 
displayed or non-displayed. We propose to introduce this functionality 
for the INAV Peg also. Where market participants see value in anonymity 
they can utilize the non-displayed order type, though by doing so, they 
will be placed lower in the priority queue within each price point. 
Conversely, those that do not value anonymity can utilize a displayed 
order type and benefit from a higher priority in the execution queue.
    The following examples illustrate how the proposed rule change 
would operate (note that the price of the order updates in response to 
changes in the INAV):

Example 1

     The best bid is $20.00 and the best offer is $20.06 at 
10:00:00 a.m. INAV is updated and published as $20.03 at 10:00:02.
     An INAV Peg Order to buy entered at 10:00:04 would be 
priced at $20.03.
     The best bid would update to $20.03 (at approximately 
10:00:04).
     The best offer would remain at $20.06.

Example 2

     The best bid is $20.00 and the best offer is $20.06 at 
10:00:00. INAV is updated and published as $19.98 at 10:00:02.
     An INAV Peg Order to sell entered at 10:00:04 would be 
priced at $19.98 and subsequently execute at $20.00 (at approximately 
10:00:04).

Example 3

     The best bid is $20.00 and the best offer is $20.10 at 
10:00:00 a.m. INAV is updated and published as $20.03 at 10:00:02.
     An INAV Peg Order to buy with a +.03 offset entered at 
10:00:04 would be priced at $20.06 ($20.03 +.03) (at approximately 
10:00:04).
     The best bid would update to $20.06 (approximately 
10:00:04).
     The best offer would remain at $20.10.
    INAV Peg Orders will allow the market participant to achieve a 
greater sense of control over the execution price as it relates to the 
fund's value by benchmarking to the estimated intraday fund's value. 
This added value to the investing public will be strongly supported by 
the ETF Sponsor community. ETF Sponsors routinely deal with investors 
that have been subject to inferior executions. These complaints are 
almost unanimously as a result of people using market orders where the 
prevailing bid/ask in the market does not necessarily correlate to the 
fund's value, and the quoted size does not meet the demand of the 
order. The INAV Peg will also help to protect investors against any 
unintended overpayment for the security.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act,\4\ in general, and furthers the objectives of Section 6(b)(5),\5\ 
in particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. The INAV Pegged Order will allow 
market participants the option to enter an order without concern about 
the value of the fund's underlying portfolio being drastically 
different and therefore resulting in an inferior execution, as the 
order will be dynamically repriced/updated throughout the life of the 
order as the value of the underlying portfolio changes. Additionally, 
it provides a more intelligent form of market order. Instead of having 
the order execute at the prevailing price (regardless of what that 
price might be relative to the fund's value) the INAV Pegged Order 
gives participants the option to collar the execution at a price that 
relates to the actual value of the fund's components. Whilst it is 
acknowledged that there is an inherent lack of execution determinism 
with a Pegged Order, market participants will be free to elect this 
order type for U.S. Component Stock ETFs where there is dynamic INAV 
data, but they will not be limited to this option, or required to use 
this option. For those market participants who are more interested in 
securing execution certainty, a conventional market order will still be 
available.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed change to Rule 4751(f)(4) 
meets the requirements of Section 6(b)(5) of the Act \6\ in that it 
will improve the stability, quality, and transparency of the national 
market system. In the event that the INAV data feed were to be 
compromised or temporarily stopped being disseminated, the use of the 
INAV Pegged Order type would be suspended (i.e., no new INAV Pegged 
Orders would be accepted into the system) until such time as the 
Exchange was confident that the integrity of the INAV data feed had 
been restored and orders utilizing the INAV pegged functionality 
already in the system would be cancelled. In addition, the Exchange is 
not aware of any circumstance where this order type could be used to 
manipulate the underlying value of the fund, and Nasdaq MarketWatch 
will perform all usual market surveillance activity on the use of the 
INAV Pegged Order.
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    \6\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. To the contrary, 
NASDAQ believes that the INAV Peg Order is pro-competitive in that it 
will offer enhance [sic] the attractiveness of NASDAQ's listings and 
trading venues.\7\
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    \7\ See Form 19b-4 at 11.

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[[Page 64170]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to 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 (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2012-117 and should 
be submitted on or before November 8, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25600 Filed 10-17-12; 8:45 am]
BILLING CODE 8011-01-P


