When youre No. 2 in ETF trading, you have to try
Nasdaq, as the No. 2 marketplace for ETFs behind the New
York Stock Exchanges electronic platform, NYSE Arca, is
known for putting more ideas out there, and right
now, its got a proposal pending with the SEC for a
new type of order for U.S. equity ETFs called an iNAV
Pegged Order. If the SEC gives it the nod, it will be a
first of its kind.
With U.S. equity ETFs, their iNAVs, or intraday net asset
values, are automatically adjusted every 15 seconds based on
the current market value of the stocks in their portfolios.
What the Nasdaq is proposing is that investors be allowed to
put in orders pegged to a U.S. equity ETFs
most recent iNAV. As the iNAV changes, so move the iNAV
Pegged Orders, the Nasdaq stated in its SEC filing, made
on October 12. Nasdaq also noted a Pegged Order may have
a limit price beyond which the order shall not be
And the point of instituting this order type, Nasdaq said in
its pitch to the SEC, is that 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 ETFs fair value for those seeking to
invest on a more informed basis.
I think its a good idea, says Michael
Rawson, an ETF analyst at Morningstar in Chicago.
Its like a limit order, but pegged to the current
iNAV of a fund, and that makes sense, he says.
But Dave Nadig, the director of research at IndexUniverse in
San Francisco, sees a number of potential problems. I
think its got its heart in the right place, but the
devils in the execution, he says.
First of all, it applies only to the ETFs that are strictly
invested in U.S. equities because those are the only ones where
its possible to get an intraday NAV that is close
to being accurate, he says. Therefore, the ETFs that hold
some mix of U.S. and international stocks, or stocks and bonds,
would be excluded, and that narrows the list of eligible ETFs
to a few hundred, he notes.
Secondarily, most ETFs trade at a spread around iNAV, but
not right at iNAV. If, say, the iNAV is 100, its very
common for the ETF to be quoted at 99.90 to the seller or
100.10 to the buyer, he says. And Nadig notes, market makers
will want to sell at iNAV plus 10 cents because
thats how the market works; thats how they make
their money. He adds that the risk is that you could miss
your trade because youre being very picky and want to get
your ETF shares at iNAV.
Whats more, Nadig says,iNAV isnt
perfect. He points out that theres no way to keep
iNAV from responding to any kind of bad data that gets fed into
it, such as a bad print on one stock out of 50 in
an ETFs basket.
In its filing, Nasdaq said that 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, and
orders already in the system would be
But, what if it doesnt get cancelled in time,
and it gets hit? asks Stephen OGrady, who was the
partner in charge of ETF trading at Kellogg Capital Markets,
before it was sold to Knight Capital Markets in October 2010.
He is now a consultant based in Mountain Lakes, New Jersey.
OGrady notes that if market makers either buy or
sell at iNAV, they cannot make any money. Thats
because market makers make their profits selling or buying
above or below iNAV, and they then hedge their bets by buying
or selling the underlying stocks.
Its the obligation of the exchanges to see that
the public is getting treated fairly, but the problem is: What
is the incentive for the market makers? Theyre the ones
who have the money at risk, not the exchange, he
But, he also notes most of the complaints about the
ETF market are that market orders get screwed. Once the
market is open, things can move very quickly, he
says. Under the current system, his advice is: Dont
put market orders in, and if you do, be prepared to get a price
youre not happy with.
So far, no comments have been filed, but the comment period
is still open though tomorrow, November 8.