The Nasdaq stock market submitted paperwork to regulators proposing fuller use of intraday net asset values (iNAV) in the pricing of equity ETFs, arguing that the integration of such a real-time pricing mechanism will limit the poor trade executions that dog the world of exchange-traded funds.
While ETF traders and market makers would still be able to use plain-vanilla market orders to transact, the second-biggest U.S. stock exchange said the ETF iNAV pegged orders it is proposing constitute a viable way to capture changes in ETF prices that will truly reflect the fact that iNAV is updated every 15 seconds.
Nasdaq noted that under the prevailing system iNAVs are typically calculated using the last sale prices of the fund’s components. But it stressed 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 the supply and demand characteristics of the fund and/or liquidity present in the marketplace.
“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,” Nasdaq said in the filing that was dated Oct. 12.
“More importantly, the INAV Pegged Order should minimize the disparity between the market execution price and the underlying fund’s value,” Nasdaq said. “As the INAV changes, so move the INAV Pegged Orders.”
The exchange said that under its proposal, which is an amendment to Rule 4751, should the iNAV data feed for a particular ETF be compromised or temporarily stopped being disseminated, it would suspend the use of the iNAV pegged order type for that ETF until it was confident the system’s integrity had been restored.
“ETF Sponsors routinely deal with investors that have been subject to inferior executions,” the filing said. “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.”
Nasdaq said that if the SEC approves its rule change proposal, it could become effective in no sooner than 45 days, though the commission could request extra time to deliberate as to whether the rule should be approved.
The exchange also solicited public comments, data and arguments regarding the proposal.