[Federal Register Volume 78, Number 15 (Wednesday, January 23, 2013)]
[Notices]
[Pages 4949-4955]
[FR Doc No: 2013-01225]

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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.
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    \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

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\
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    \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\
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    \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

the closest calculation of underlying value generally available.\24\
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    \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\
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    \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\
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    \31\ See Response Letter, supra note 8, at 2.
    \32\ Id. at 3.
    \33\ Id.
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    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\
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    \34\ See ICI Letter, supra note 5, at 4.
    \35\ Id.
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    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\
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    \36\ See Response Letter, supra note 8, at 3.
    \37\ Id.
    \38\ Id.
    \39\ Id.
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    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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    \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\
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    \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\
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    \48\ See Response Letter, supra note 8, at 3.
    \49\ Id.
    \50\ Id.
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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

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\
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    \51\ See ICI Letter, supra note 5, at 3.
    \52\ Id.
    \53\ Id.
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    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\
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    \54\ See Response Letter, supra note 8, at 2.
    \55\ Id.
    \56\ Id.
    \57\ Id.
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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.
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    \58\ 15 U.S.C. 78s(b)(2)(B).
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    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.
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    \59\ 15 U.S.C. 78s(b)(2)(B).
    \60\ 15 U.S.C. 78f(b)(5).
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    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).
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    \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

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\
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    \65\ See Response Letter, supra note 8, at 2.
    \66\ Id. at 3.
    \67\ Id. at 2-3.
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    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.
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    \68\ See supra Section III.
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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).
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    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

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.
---------------------------------------------------------------------------

    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?
---------------------------------------------------------------------------

    \79\ See ICI Letter, supra note 5, at 5.
    \80\ See id.
---------------------------------------------------------------------------

    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?
---------------------------------------------------------------------------

    \81\ See Response Letter, supra note 8, at 2.
---------------------------------------------------------------------------

    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?
---------------------------------------------------------------------------

    \82\ See Response Letter, supra note 8, at 3.
---------------------------------------------------------------------------

    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?
---------------------------------------------------------------------------

    \83\ See ICI Letter, supra note 5, at 3.
    \84\ Id.
    \85\ See Response Letter, supra note 8, at 2.
---------------------------------------------------------------------------

    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?
---------------------------------------------------------------------------

    \86\ See ICI Letter, supra note 5, at 2.
    \87\ See id.
    \88\ See id.
    \89\ See Response Letter, supra note 8, at 2.
---------------------------------------------------------------------------

    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>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 February 13, 2013. Rebuttal comments should
be submitted by February 27, 2013.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\90\
---------------------------------------------------------------------------

    \90\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-01225 Filed 1-22-13; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 78, Number 117 (Tuesday, June 18, 2013)]
[Notices]
[Pages 36625-36627]
[FR Doc No: 2013-14395]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69739; File No. SR-MIAX-2013-27]

Self-Regulatory Organizations; Miami International Securities
Exchange LLC; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Modify the Definition of ``Attributable Order''

June 12, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on June 4, 2013, Miami International Securities Exchange LLC
(``Exchange'' or ``MIAX'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange is filing a proposal to amend Exchange Rule 516 to
modify the definition of ``Attributable Order.''
    The text of the proposed rule change is available on the Exchange's
Web site at http://www.miaxoptions.com/filter/wotitle/rule_filing, at
MIAX's principal office, 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
    The Exchange received approval to be registered as a national
securities exchange on December 3, 2012 \3\ and commenced trading
operations on December 7, 2012. At that time, the Exchange included in
Exchange Rule 516 definitions of order types that the Exchange intended
to use after the commencement of trading on the Exchange. The preamble
of Rule 516 notes that not all of the order types listed and described
in Rule 516 will be initially available for use on the Exchange. In
addition, Rule 516 provides that the Exchange will issue a Regulatory
Circular listing which order types, among the order types defined in
Rule 516, are available and that additional Regulatory Circulars will
be issued as additional order types become available for use on the
Exchange.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 68341 (December 3,
2012) 77 FR 73089 (December 7, 2012) (File No. 10-207).
---------------------------------------------------------------------------

    The Attributable Order type, defined in Rule 514(e), exists as one
such order type that was not originally available at the commencement
of trading on the

Exchange. The Exchange has now developed the necessary technology to
support the Attributable Order type and would like to correspondingly
modify its definition contained in Rule 516(e) to accommodate the
functionality that will be implemented at this time. Pursuant to Rule
516(e), an Attributable Order is a market or limit order which displays
the user firm ID for purposes of trading on the Exchange. Use of
Attributable Orders is voluntary.\4\
---------------------------------------------------------------------------

    \4\ See MIAX Rule 516(e).
---------------------------------------------------------------------------

    The ability to display information pertaining to a single order
depends upon the Exchange's ability to broadcast that information to
its members. This is currently accomplished through the Exchange's
market data products, which for example includes the MIAX Top of Market
(ToM).\5\ Thus, the functionality of an Attributable Order is linked to
what is technologically feasible through the Exchange's market data
products. The Exchange would like to modify the definition of
Attributable Order contained in Rule 516(e) to acknowledge this
relationship and to allow the functionality of the Attributable Order
type to develop and be deployed correspondingly with technical advances
related to its market data products. The Exchange proposes adding the
following: ``Attributable Orders will be available for execution but
may not display the user firm ID for all Exchange processes.'' This
concept, which can be found in the definition of Attributable Orders of
other options exchanges,\6\ will serve to put MIAX members on notice
that the functionality of an Attributable Order to display the user
firm ID, as it continually develops, may not be available during all
Exchange processes. The Exchange proposes adding to Rule 516(e) that
the Exchange will inform its members through a Regulatory Circular of
the various Exchange processes in which the user firm ID of
Attributable Order will be displayed.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 69007 (February 28,
2013) 78 FR 14617 (March 6, 2013) (SR-MIAX-2013-05).
    \6\ See C2 Rule 6.10(f); ISE Rule 715(h); NYSE Arca Rule
6.62(x); NYSE MKT Rule 900.3NY(v).
---------------------------------------------------------------------------

    The Exchange believes that the proposed additional language in the
Rule text will provide the Exchange the necessary flexibility to allow
the Attributable Order type to display the user firm ID in additional
Exchange processes while the Exchange continues to develop them. For
instance, at its initial launch, Attributable Orders may be entered
into and rest on the Exchange System and will only display the user
firm ID through the Exchange market data products when the Attributable
Order initiates a Liquidity Refresh Pause \7\ or a Route Timer.\8\ If
the Exchange develops the Attributable Order to display the user firm
ID in an additional Exchange process, for example during the Opening
process, the Exchange will update its members through a Regulatory
Circular as proposed in this filing.
---------------------------------------------------------------------------

    \7\ See Rule 515(c)(1)(iii)(A).
    \8\ See Rule 529(b)(2).
---------------------------------------------------------------------------

2. Statutory Basis
    MIAX believes that its proposed rule change is consistent with
Section 6(b) of the Act \9\ in general, and furthers the objectives of
Section 6(b)(5) of the Act \10\ 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, to remove impediments to and perfect the mechanisms of a
free and open market and a national market system and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that proposal will remove impediments to and
perfect the mechanism of a free and open market and a national market
system because it would allow firms to better manage order flow by
understanding the Attributable Order type functionality available on
the Exchange. In addition, the proposed clarifying language will
protect investors and the public interest by eliminating potential
confusion that could be caused by the current description of order type
functionality which may imply that the Attributable Order is available
for all Exchange processes. The Exchange notes that the current
available processes for the Attributable Order type do not encompass
all the potential Exchange processes in which the Exchange believes
would be useful to offer the Attributable Order, such as a price
improvement mechanism or complex order mechanism which the Exchange may
deploy in the future.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. . The Exchange believes that
the proposal will would provide member organizations with the
information required for better use of the Attributable Order type. The
Exchange notes that it operates in a highly competitive market in which
market participants can readily direct order flow to competing venues
who offer similar functionality. Many competing venues offer similar
functionality to market participants. To this end, the Exchange is
proposing adding more detail regarding one of its order types and a
mechanism, specifically the Regulatory Circular, to provide continuing
updates. The Exchange believes the proposed rule change is pro-
competitive because the added information regarding the Attributable
Order type would enable member organizations to better compare the
functionality of the Attributable Order type on the Exchange to that of
other exchanges.

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

    The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act\11\ and Rule 19b-4(f)(6) thereunder.\12\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \13\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\14\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the

Commission to waive the 30-day operative delay, noting that doing so
will, among other things, protect investors by avoiding potential
confusion regarding the availability of Attributable Orders. The
Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest. In
particular, MIAX's Rule 516 (Order Types Defined) already provides that
certain order types would not be available when MIAX initially
commenced operations. Specifically, MIAX Rule 516 provides that ``. . .
not all of the order types listed and described in this rule will be
initially available for use on the Exchange. The Exchange will issue a
Regulatory Circular listing which order types, among the order types
set forth below, are available.'' Paragraph (e) of MIAX Rule 516 sets
forth the applicable provision on Attributable Orders. In addition to
defining that order type and noting that its use is voluntary,
Paragraph (e) states that ``[t]he Exchange will issue a Regulatory
Circular specifying the class(es) of securities for which the
Attributable Order type shall be available.'' As such, MIAX currently
has the ability to begin to offer the Attributable Order type on its
market without submitting a rule change to the Commission. However,
this proposed rule change would further clarify Paragraph (e) by
stating that Attributable Orders will only display the user firm ID for
those exchange processes that are specified by MIAX. MIAX further
clarifies that it will issue a Regulatory Circular that specifies the
applicable Exchange processes and classes of securities for which
Attributable Order types will display the user firm ID. Waiving the 30-
day operative delay in this case will allow MIAX to avoid investor
confusion by immediately clarifying the applicable rule text to reflect
the current state of Attributable Orders on MIAX as it begins to offer
this order type to market participants and will allow MIAX to
accommodate this order type as it develops the technological capability
to fully utilize it through MIAX's market data products. Accordingly,
the Commission hereby grants the Exchange's request and designates the
proposal operative upon filing.\15\
---------------------------------------------------------------------------

    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such 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:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-MIAX-2013-27 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-MIAX-2013-27. 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 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 publicly available. All
submissions should refer to File Number SR-MIAX-2013-27 and should be
submitted on or before July 9, 2013.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority. \16\
Kevin M. O'Neill,
Deputy Secretary.
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2013-14395 Filed 6-17-13; 8:45 am]
BILLING CODE 8011-01-P