After the last few years of wild market swings, the so-called flash crash and the recent Knight algorithm debacle, many have noticed poor executions on exchange traded fund during volatile sessions. In an attempt to help diminish the costs of poor trades, Nasdaq has proposed trade orders based on the “INAV.”
Nasdaq filed a proposal with the SEC to allow a new trade order for domestic equity ETFs that would peg the price to their indicative net asset value – the INAV Peg order, reports Jackie Noblett for Ignites.
The INAV, intraday indicative value or indcative optimized portfolio value provide an estimate of the fund’s net asset value based on the fund’s underlying holdings. ETF providers disclose the INAV every 15 seconds. [Trading Disruptions Underline Importance of ETF Market Makers]
According to the filing, the INAV Peg Order would allow investors to have more control over the execution price relative to what it’s price is on the exchange. Consequently, investors would have more information on whether or not they are buying at a premium or discount to the NAV since the trades track the INAV.
“ETF sponsors routinely deal with investors that have been subject to inferior executions,” Nasdaq said. “These complaints are almost unanimously as a result of people using market orders where the prevailing bid/ask spread 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 over payment for the security.”
Tim Coyne, head of ETF capital markets at State Street Global Advisors, has commented that RIAs and institutional asset managers are as concerned about liquidity and trading strategies as ETF performances.
“Not only can it drive people away from your product, it can drive people away from your platform,” Eric Pollackov, managing director of ETFs at Charles Schwab, said about ETF trade executions.
Earlier this year, the New York Sock Exchange Arca proposed to allow ETF sponsors pitch cash incentives to market makers directly to generate higher liquidity. [ETF Providers on ‘Pay to Play’]
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.