The New York Stock Exchange has always taken a leadership role in introducing market structure innovations that improve outcomes for our issuers and investors. Over the past three years, we've worked with the industry to roll out a series of enhancements to NYSE Arca, our listings market for exchange traded products (ETPs).
On Monday, June 4, we introduced a new data-driven, efficient mechanism for setting an official closing price for NYSE Arca-listed ETPs.
ETPs trade on exchanges like traditional equity securities, as buy and sell orders interact on a limit order book. Instead of reflecting the value of a single issuer's stock, ETP prices reflect the value of an underlying index or asset portfolio, which can track or consist of multiple assets, such as stocks, bonds, commodities, and derivatives. The price of an ETP share, accordingly, will follow movements in the values of the components of the ETP.
The ETP industry has attempted to better reflect the actual value of ETPs by providing highly transparent information, including publishing a Net Asset Value (NAV), daily holdings details, and Intraday NAVs - in addition to the bid and offer of the ETP during market hours. At the end of each trading day, ETPs, like stocks, are valued at the last price at which they traded. This method has its downside as the last time an ETP traded is not always reflective of an ETP's current underlying value.
On any given day, there are a large number of ETPs that do not trade at all, or only have trades in share amounts less than a round lot (generally 100 shares). Because the current official closing value price is the price of the last round lot trade, no matter how long ago that trade occurred, it is possible to have two ETPs that track similar assets valued very differently simply because one ETP has traded recently and the other has not.
A better approach for establishing a closing price
On March 20, 2018, the SEC approved NYSE Arca's proposal for a new method to calculate the closing price for ETPs listed on NYSE Arca. If a particular ETP did not have a closing auction, NYSE Arca will derive the official closing price for that ETP by adding a percentage of the time-weighted average price ("TWAP") of the midpoint of the National Best Bid and Offer ("NBBO") of the last five minutes of trading with a percentage of the last sale price during that same period. In this calculation, a last-sale trade price closer to 4pm has more weight than the TWAP of the NBBO midpoint.
Conversely, the TWAP of the NBBO midpoint is assigned more weight if the last-sale trade price was at 3:55 p.m. or earlier. If the ETP doesn't trade during the closing auction, this calculation will serve as the official closing price and act as the market's reference point for the ETP's daily valuation.
Why is this important?
For newer and less-frequently traded ETPs, this change will provide issuers with a daily closing valuation that is more accurate and better aligned with peer products. For the marketplace, this new closing price mechanism will provide global investors with a more accurate reference point of their ETP's true value based on the underlying holdings.