Going, Going, Gone Jonathan Mazer and Alison Rende Not So Fast Albert Neubert Is That An ...

55 Pages·2009·2.54 MB·English

Going,Going,Gone
Jonathan Mazer and Alison Rende
Not So Fast
Albert Neubert
Is That An Elephant In The Room?
Jim Wiandt
Synthetic EAFE Futures
Nick Ronalds and Colin Anderson
Adrift No More
W.Brian Barrett and Thomas Sanders
Plus the latest from Israelsen,Blitzer and Hougan
w w w. i n d ex u n i ve r s e. com/JOI
Vo l . 8 No. 6
f e a t u r e s
Going, Going, Gone
by Jonathan Mazer and Alison M. Rende . . . . . . .10
Recent case law suggests index licensing fees may go
the way of the dodo. Ummm… yike s !
Is That An Elephant In The Room?
by Jim Wiandt . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Wiandt tackles the big question:Which produces bet-
ter returns, ETFs or index funds? And why?
Not So Fast
by Albert Neubert . . . . . . . . . . . . . . . . . . . . . . . . .26
End index licensing fees, as Mazer and Rende suggest,
and the golden age of indexing will shutter to a halt.
The Synthetic EAFE Index
by Nick Ronalds and Colin Anderson . . . . . . . . . .30
C reating a synthetic EAFE futures position is no picnic; 16
the CME offers an alternative.
Adrift No More
by W. Brian Barrett and Thomas B. Sanders . . . . . . .3 6
The “systemic drift” of the U.S. Dollar Index has vanished
in the face of the euro and an improved index.
The Sum vs. The Parts
by Craig Israelsen . . . . . . . . . . . . . . . . . . . . . . . . . .42
Israelsen focuses on what really matters in the index vs.
active debate:p e rformance at the portfolio level.
Talking Indexes
by David Blitzer . . . . . . . . . . . . . . . . . . . . . . . . . . .48
Returns are all anyone talks about. What about the
other half of the equation? We need more focus on risk.
Reality Check
By Matt Hougan . . . . . . . . . . . . . . . . . . . . . . . . . . .64
30
The S&P 500 Equal-Weight ETF gets five stars? That
must drive active fund managers crazy.
n e w s
Lifecycle Boom? . . . . . . . . . . . . . . . . . . . . . . . . . . .51
PowerDeutsche . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
From A(luminum) to Z(inc) . . . . . . . . . . . . . . . . . . .51
That’s Bond… AmeriBond . . . . . . . . . . . . . . . . . . .51
Expensive, Eh? . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
Indexing Developments . . . . . . . . . . . . . . . . . . . . .52
Around the World of ETFs . . . . . . . . . . . . . . . . . . .54
Knowing Your Options . . . . . . . . . . . . . . . . . . . . . .57
From the Exchanges . . . . . . . . . . . . . . . . . . . . . . . .57
On the Move . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
d a t a
Selected Major Indexes . . . . . . . . . . . . . . . . . . . . . .59
Returns Of Largest U.S. Index Mutual Funds . . . . .60
Active Vs. Passive Statistical Redux . . . . . . . . . . . . .60
U.S. Market Overview In Style . . . . . . . . . . . . . . . .61
U.S. Economic Sector Review . . . . . . . . . . . . . . . . .62 42
Exchange-Traded Funds Corner . . . . . . . . . . . . . . . .63
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www.indexuniverse.com/JoI November/December 2006 1
CCoonnttrriibbuuttoorrss
David Blitzeris the chairman of the S&P 500 Index Committee and a member of
Standard & Poor's Investment Policy Committee and Economic Forecast Council.
He previously served as corporate economist at McGraw-Hill and as senior eco-
zer nomic analyst with National Economic Research Associates. Dr. Blitzer is often
Blit quoted in the national business press and is the author of Outpacing the Pros: Using
d
vi Indices to Beat Wall Street's Savviest Money Managers, McGraw-Hill, 2001.
a
D
Craig Israelsen is an associate professor at Brigham Young University in Provo,
Utah. He holds a Ph.D. in Family Resource Management from Brigham Young
University and a M.S. in Agricultural Economics from Utah State University. He
en taught personal and family finance at the University of Missouri for 14 years, prior
aels to returning to BYU. Primary among his research interests is the analysis of mutu-
g Isr al funds. Israelsen writes monthly for Financial Planning magazine.
ai
Cr
Jonathan Mazer, a partner at the law firm of Fox Horan & Camerini LLP, has
been in private practice since 1994. An experienced litigator, he represents
international and domestic clients, concentrating his practice on complex
er commercial disputes. He has a J.D. from New York University School of Law
z
Ma and a master’s degree in philosophy from the New York University Graduate
n
a School of Arts and Sciences.
h
at
n
o
J Albert Neubert is senior vice president of business development at
Information Management Network (IMN) and is a leading index industry con-
sultant. Neubert previously worked at Dow Jones Indexes and STOXX, and at
S&P Indexes, where he managed the S&P 500, and led the development of the
ert S&P MidCap 400, S&P SmallCap 600 and SuperComposite 1500 indexes. Mr.
b
u
e Neubert holds an M.B.A. from New York University.
N
ert
b
Al Alison M. Rendeis a law clerk to the Honorable Richard K. Eaton of the United
States Court of International Trade. She was formerly a litigation associate at
Fox Horan & Camerini LLP, where her practice focused on complex commercial
disputes in the federal and state courts. She graduated cum laude from Pace
der Law School and was an editor of thePace International Law Review.
n
e
R
M. Tom Sanders teaches derivatives, banking and international finance at the
n
Aliso University of Miami, and has a Ph.D. in Finance from the University of Colorado.
He has written articles on derivatives and banking for the Journal of Futures
Markets; Journal of Multinational Financial Management; Journal of Financial Services
Research; International Journal of Finance; and the Commercial Lending Review, among
other publications. He previously worked as an international loan officer for sev-
eral New York banks.
ers
d
n
a
S W. Brian Barrettis associate professor of Finance at the University of Florida. Dr.
m
To Bryant received a Ph.D. from the Georgia Institute of Technology in 1983, and
holds the Chartered Financial Analyst designation. He is a specialist in bond mar-
kets, financial futures, portfolio management and interest rate models. His
research articles have appeared in the Journal of Finance, Financial Review, Journal of
Banking and Finance, Journal of Financial Research, and The Financial Analysts Journal,
among other publications.
Nick Ronaldsis a director in the futures group at UBS Securities LLC, responsible
for working with clients on risk and portfolio management strategies. He previ-
ously worked in global marketing at ABN AMRO. With deep experience in Asia,
Ronalds earlier served as a managing director of the joint Chicago Mercantile
Exchange/the Chicago Board of Trade representative office in Tokyo. He holds the
Chartered Financial Analyst designation.
2 November/December 2006
Jim Wiandt
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EEddiittoorr’’ss NNoottee
What Intellectual
Property?
W
e’ve never been afraid of a little controversy at the Journal of Indexes. It is
often a dose of controversy that helps arouse passions and open up some
nice substantive discussion. It’s what our adversarial system of justice is all
about, and the end is supposed to be Truth.
This issue we dive into that adversarial system of justice anddish up a big helping of
controversy through the detailed analysis of two attorneys, Jon Mazer and Alison Rende,
who examine the turbulent world of index industry intellectual property. The analysis is JimWi a n d t
smart, and it’s a bombshell: With a detailed look at case law, Mazer and Rende argue that Editor
… and you may want to sit down here … the (ahem) somewhat-more-than-trivial right
of index providers to charge licensing fees on products meant to track them may not exist.
Al Neubert begs to differ.
In his inaugural Inside/Out column, ex- S&P and Dow Jones insider Neubert maintains
that, if what the two attorneys say is true, you might as well be able to mix up some syrup
and brown food coloring and say you’re selling Coca-ColaTM.
On the heels of all of this controversy, I thought I’d add some of my own. I have a study
in this issue comparing the relative performance of ETFs and mutual funds, and providing
an analysis of the differences. And there are differences …
Next up is an extremely interesting analysis of the costs and benefits of synthetically
tracking the EAFE index versus the one-stop-shopping provided by the new EAFE futures
contract that is now trading on the CME.
On the currency side, we have a nice article by Professors W. Bryan Barrett and Tom
Sanders on the disappearance of the drift factor in the reworked USDX Dollar Index.
The issue also includes a nice submission by Craig Israelsen—the second strong piece
of research he’s done for us covering the active vs. passive question. Professor Israelsen
is refreshingly nonpartisan on the active vs. passive debate, and he believes that it’s crit-
ical that investors view examine the issue on a portfolio and not simply a fund level, since
ultimately, overall portfolio performance is what counts.
As always, we include a lively column from David Blitzer, who pontificates about risk
and the new index product innovations that are in the pipeline. Finally, the back page is
graced by a raucous column from Matt Hougan on Rydex’s S&P 500 Equal-Weight ETF, RSP,
which he dubs “the idiot savant of strong performance.” Indeed …
It’s that time of the year again. Stay tuned for the William F. Sharpe Indexing
Achievement Award winners. The results will be posted in real time on IndexUniverse.com
after the Super Bowl of Indexing in Phoenix December 3-6. Happy Holidays.
Jim Wiandt
Editor
8 November/December 2006
Going … Going … Gone?
What Dow Jones v. ISE means for intellectual property
rights in the indexing business
by Jonathan Mazer and Alison M.Rende
10 November/December 2006
I nt rod u ct i o n erty rights that index providers have in their indexes with
This article reviews the relevant case law and examines District Judge Milton Pollack’s 1982 decision in Standard &
whether, under prevailing legal precedents, exchange-traded Poor’s Corp. v. Commodity Exchange, Inc.6(“COMEX”). In COMEX,
funds (“ETFs”), mutual funds or other investment vehicles Standard & Poor’s (“S&P”) sought both a preliminary and per-
may track the same basket of stocks that make up an index manent injunction7 restraining Commodity Exchange, Inc.
without obtaining (or paying for) a license. (“Comex”) from selling futures contracts “based on the use of
Index providers have long argued that they have an intel- the S&P’s name or the S&P 500 Stock Index.”8
lectual property right in the basket of stocks and other com- The facts of COMEX were as follows. Comex wished to
ponents that comprise their indexes. Based on their consid- trade futures contracts on its exchange, and to that end,
erable success in defending this right, they limit the number sought a license from S&P to use the S&P 500 Index. S&P
of ETFs and other financial products that track their indexes refused to grant Comex a license. Instead of abandoning the
by entering into exclusive and restrictive licensing agree- idea, relying on some other index or creating a new index,
ments with product developers. These agreements have Comex decided to proceed without a license. The exchange
become a central part of the industry’s business model, and applied to the Commodities Futures Trading Commission for
they collectively represent tens, if not hundreds, of millions of permission to sell contracts based on what it called the
dollars in annual revenues.1 “Comex 500 Stock Index,” which “would use the same 500
A recent ruling by the United States Court of Appeals for stocks and the same method of computation as the Standard
the Second Circuit, however, has thrown these rights—and & Poor’s 500 Stock Index.”9S&P opposed the application and
this business model—into question. In Dow Jones & Co. v. sued for an injunction.10
International Securities Exchange, Inc.2 (“ISE”), the court found After a hearing, the court found that S&P would likely suc-
that index providers do not have the right to restrict the list- ceed on its misappropriation claim. S&P was a long-standing
ing of options based on ETFs that track their indexes. and trusted provider of various informational services to the
Although the ISE ruling dealt narrowly with options, the financial community, largely through the sale of copyrighted
court left open a much larger question: whether index publications. S&P licensed the use of its 500 index to other
providers have any right to prevent use of their indexes for data disseminating organizations. S&P also licensed the index
financial products. It may seem obvious that they do, but a to the Chicago Mercantile Exchange for index futures trading,
careful reading of recent case law suggests that the courts the same activity that Comex intended to engage in.
may be ready to bring the period of exclusive and restrictive The court found that the S&P 500 Index was “developed
index licensing agreements to an abrupt end. and maintained by S&P at considerable expense and effort,”
and that while the S&P disseminated the list of constituent
Ba c kg ro u n d :The To rt Of Mi s a p p ro p ri at i o n stocks and the formula used to calculate the index, “the actu-
M i s a p p ropriation is a doctrine found in common law, and it al minute to minute and day-to-day calculations depend upon
is not easy to define. To illustrate this doctrine, courts fre- certain inputs determined solely and exclusively by S&P based
quently cite a 1918 United States Supreme Court case called on special calculations and determinations known only to
International News Service v. Associated Pre s s (“International News S&P. . . . [T]he exact numerical values of the Index cannot be
S e rv i c e ”) .3 In that case, the Associated Press (“A P”) sought an calculated by Comex or any other third party without S&P’s
injunction to prevent the International News Service (“INS”) direct participation . . . .” 11
f rom distributing to INS’s customers, commercially and for In controlling the index, S&P permitted some uses and
p rofit, news that had been gathered and published by AP. The rejected others based on its perception of how the use would
district (or trial-level) court granted the injunction, and the affect S&P’s reputation.
appellate court affirmed. The Supreme Court upheld the Judge Pollack found that Comex’s plan to sell the contracts
injunction as well, finding that AP and INS were “competitors would “impro p e r l y . . . misappropriate the property of
in business” and that INS had engaged in unfair competition by [S&P].”12 He also concluded that, were Comex allowed to
transmitting news it had appropriated from AP “for commerc i a l begin selling the futures contracts while the case was pend-
use, in competition with[AP] . . . .” 4[Emphasis added.] ing, it was likely that irreparable harm would result. First, S&P
For reasons that are beyond the scope of this article, the might be harmed because: a) it might lose revenues it other-
decision in International News Serv i c e is no longer binding on wise would have earned under its agreement with the
individual states. But to the extent that the doctrine of misap- Chicago Mercantile Exchange, in an amount difficult to calcu-
p ropriation survives in New York, the site of the recent I S Er u l- late; and, b) it would lose control of its marks, name and
ing, the basic reasoning of International News Serv i c e s has been index, which “even if only tarnished . . . cannot be restored to
adopted nonetheless. In particular, the re q u i rement of dire c t their full value.”13 Second, and more critically, Judge Pollack
competition between the defendant accused of misappro p r i a- found that the public could be harmed if trading in the con-
tion and the product or service offered by the plaintiff has been tracts was allowed and then abruptly brought to a halt if the
recognized by the Court of Appeals for the Second Circuit with- permanent injunction was granted later.
in the last ten years as a re q u i rement of New York law.5 In sum, Judge Pollack granted the preliminary injunction
based both on the possibility of irreparable harm if the pre-
Mi s a p p ro p ri ation Of An Index :The COMEX Ca s e liminary injunction was not granted and the likelihood that
We start our discussion of the scope of intellectual prop- S&P would eventually succeed on the merits and win a per-
www.indexuniverse.com/JOI November/December 2006 11
manent injunction. This was a critical success in the index unlikely that an adverse decision will cause [Dow Jones] to
providers’ defense of their intellectual property rights. cease to produce its averages.” On the other hand, holding
Judge Pollack’s grant of a preliminary injunction was that the Board of Trade’s proposed use of the averages was a
appealed to the Court of Appeals for the Second Circuit and misappropriation might “stimulate the creation of new index-
affirmed. However, the Second Circuit steered clear of decid- es perhaps better suited to the purpose of ‘hedging’ against
ing anything about the merits (or likely merits) of the claim of the ‘systematic’ risk present in the stock market.”18
misappropriation. Instead—and this is an important point In the end, a majority of the court ruled in favor of Dow
that is easily missed—without deciding the merits of the case at Jones, finding that the societal interest in encouraging the cre-
all, the Second Circuit affirmed the preliminary injunction ation of new indexes was the consideration that tipped the
based on the possible harm to the public, which it found like- scales. In ruling for Dow Jones, the court gave an expansive
ly if trading in the contracts were abruptly halted. reading to the concept of misappropriation first described in
International News Serv i c e ,because it ruled in favor of Dow Jones
C B OTAnd The Gre ater Good despite the fact, explicitly found, that the Board of Trade’s pro-
Competing neck-and-neck with C O M E X as the index posed use of the averages “is not in competition with the use
providers’ favorite intellectual property decision is the 1983 [Dow Jones] presently makes of [the averages].”1 9
Illinois Supreme Court decision in Board of Trade of the City of The court’s ruling in favor of Dow Jones, and particularly
Chicago v. Dow Jones & Co.14 (“CBOT”).The underlying facts in its expansive reading of what constitutes an actionable “mis-
CBOT were similar to those in the COMEX case, but the pro- appropriation,” was the subject of a spirited dissent. For the
cedural posture was different. As a result, the merits of the reasons outlined below, we believe that this dissent, rather
dispute were squarely ruled upon. The Board of Trade of the than the majority opinion, may be followed by other courts
City of Chicago (“Board of Trade”) sought a declaration that that are not bound by either COMEX or the majority in CBOT.
its offering of a commodity futures contract utilizing the Dow
Jones Industrial Average as the underlying commodity would The C B OTDi s s e nt
not violate any legal or proprietary rights of Dow Jones & The judges in CBOTsplit four to three, with the slim major-
Company (“Dow Jones”). The Board of Trade won at the trial ity ruling in favor of Dow Jones. The dissenting judges in
level, but its victory was reversed on appeal.15 CBOTtook a far narrower view of what constituted misappro-
Dow Jones was a provider of financial information, such as priation than the majority, balanced the economic and social
its Dow Jones Industrial Averages, which it disseminated in a factors differently than the majority, and would have affirmed
variety of ways including “teleprinters” and “cathode ray-tube the trial court decision allowing the Board of Trade to sell the
receivers.” (Just as the technology has evolved markedly since contemplated futures contracts without a license from Dow
1983, so too has the use of indexes as the basis for invest- Jones.
ment products!) Those interested in stock market news could To be clear: the CBOTmajority decision is the law of Illinois
subscribe to Dow Jones’s transmissions. One subscriber was and binds the lower courts of that state. Broadening out,
the Board of Trade. Dow Jones was not selling futures con- however, neither the COMEX decision nor the CBOTdecision
tracts at that time or licensing others to do so; thus, it neither binds a federal or state court when considering the merits of
offered nor licensed a product in direct competition with the a misappropriation claim under New York law. Both decisions
proposed contracts. are what is known as “persuasive” authority, which can be fol-
The Board of Trade wanted to become a market for stock lowed or rejected by any court not deciding Illinois law.
index futures. To that end, it spent two years developing its Likewise, the dissenting opinion in CBOT is also persuasive
own index to be used as a basis for futures contracts. In the authority, and could be followed by a court if it found the rea-
end, however, it appeared unlikely that trading in such con- soning more convincing.
tracts would be approved by industry regulators unless the The dissenting judges in CBOT argued that the majority
contracts “w e re based on widely known and well-established had usurped the legislative function and “broadly expanded
stock market indexe s . ”1 6As a result, the Board of Trade sought the tort of misappropriation in Illinois” by ignoring the
a p p roval to trade contracts based on the Dow Jones averages. requirement that, to misappropriate intellectual property, the
The Board of Trade’s expert described the purpose of the use must be in “direct competition” with the person who cre-
contracts as a means of hedging against the so-called “sys- ated that property.20 Since Dow Jones was in the business of
tematic” risk that stock prices might decline.17 The idea— disseminating information, and not in the business of selling
familiar to all of us today—is that, instead of selling their futures contracts or other securities, it did not compete with
shares and incurring capital gains and other costs, investors the Board of Trade. Even if Dow Jones were to seek to license
could reduce or avoid systematic risk (and defer taxes and its name for use in connection with futures contracts (which
other costs) by purchasing index-based futures contracts at a it had not done and did not intend to do at the time of the
much lower price. CBOTdecision), the dissent said it would not satisfy the com-
The court sought to balance the possible economic and petition requirement. In the view of the dissent, the majority
social consequences of ruling in favor of Dow Jones against had balanced the social and economic factors in the wrong
those of ruling in favor of the Board of Trade. On the one direction: “The majority errs, in part, because it has failed to
hand, the court reasoned, if the Board of Trade was allowed place enough emphasis on the unfettered access to ideas in
to go forward with the contracts as proposed, “it appears the public domain, a privilege which is essential to our free
12 November/December 2006
market economy.”21 for its arguments, but the court, reading those cases narrow-
The dissenters did not suggest that the Board of Trade ly, held that they were inapplicable because “the defendants
could use Dow Jones’s name for its product or claim an affili- have not copied the Index or created a product—such as a
ation with Dow Jones. Instead, they only argued that the futures contract—that is linked to the index.”27 The court
Board of Trade could use the stocks in the Dow Jones aver- also made a point of noting that the Second Circuit had not
ages as the basis for its contracts. The dissenters would have reached the merits of the claim in C O M E X.It follows,
affirmed the trial court decree, which would not have pre- although not stated by the Archipelagocourt, that the Second
vented Dow Jones “from licensing its name to sponsor a stock Circuit’s decision in COMEX does not stand for the proposi-
market futures index in competition with the one to be tion that copying an index or creating a product based on an
offered by the Board of Trade.”22The trial court decree would index is an actionable misappropriation.
also have required the Board of Trade to disclaim any affilia-
tion with or sponsorship by Dow Jones. The right of Dow The Latest Pro n o u n ce m e nt :The I S ECa s e
Jones to grant or withhold its endorsement of a product was Less than two years after the decision in Archipelago, the
something the dissenters sought to protect, even as they Second Circuit had occasion to look closely at COMEX and
opined that the makeup of the index should be available for CBOT in the ISE case. Following Archipelago’s lead, the court
non-competitive use by the Board of Trade. construed those decisions narrowly.
In ISE, decided in June 2006, the Second Circuit ruled on
Arc h i pelago And Golden Nugget:The Index Prov i d e r s’ what it characterized as a “narrow and highly specific ques-
Position We a ke n s tion,” which was “whether an options exchange, by creating,
In the COMEX and CBOT cases, decided in the early listing, and facilitating the trading of options on shares of an
1 9 8 0 s ,2 3 the index providers did very well. The index [ETF] designed to track a proprietary market index, misap-
provider’s initial defeat in the trial court in CBOTwas reversed propriates intellectual-property rights of the creator of the
on appeal, and while the dissent in CBOThad interesting argu- index.”28 The court affirmed the lower court’s ruling that
ments, those arguments lost. there was no misappropriation.
In Nasdaq Stock Market, Inc. v. Archipelago Holdings, LLC2 4 The Second Circuit’s opinion is interesting as much for what
(“A rc h i p e l a g o ”), decided in 2004, the outcome was very differ- was decided as for what was not decided. Reversing the usual
ent. There, the index provider lost on its misappro p r i a t i o n p ro c e d u re, let’s look first at the issues that were not re a c h e d .
claim at the trial level, and the decision was not reviewed on The index providers in question were McGraw- H i l l
a p p e a l . (Standard & Poor’s) and Dow Jones. Each claimed that it had
In Archipelago,Nasdaq Stock Market, Inc. (“NASDAQ”) sued “invested time, money and intellectual creativity into the cre-
the Archipelago Exchange, LLC (“Arca Exchange”) alleging mis- ation and maintenance of its indexes,” which “gives it an
appropriation, among other claims, for facilitating the trading intellectual-property right in the index itself, as well as the
of shares in the Nasdaq-100 Trust Series 1 ETF (called QQQ) ETF that tracks this index, and in options on shares of such an
without a license. NASDAQ sought money damages and an ETF.”29The court expressly did not reach the merits of these
injunction preventing Arca Exchange from continuing to facil- claims, however, and did not endorse the index providers’
itate the sale of QQQ shares. view of their intellectual property rights:
The court dismissed the claim, reasoning that NASDAQ did We assume, for purposes of this decision—though we
not have any protectable interest in the QQQ shares held by do not reach this issue—that each of the plaintiffs pos-
investors. The court’s argument relied heavily on the Court of sesses an exclusive intellectual-property right in the
Appeals for the Ninth Circuit’s decision in Golden Nugget, Inc. index it created and in the ETF which has been struc-
v. American Stock Exchange, Inc.25 (“Golden Nugget”). In Golden t u red to duplicate the index.3 0
Nugget, the plaintiff, a corporation listed on the New York Not surprisingly, the index providers cited COMEX and
Stock Exchange, brought a misappropriation claim against the CBOTas precedent in support of their position.31Rather than
American Stock Exchange and the Options Clearing take the expansive reading of those precedents, however, the
Corporation for trading options on Golden Nugget stock Second Circuit found that COMEXand CBOTdid not apply and
without its permission. The Ninth Circuit rejected Golden relied instead on Golden Nuggetand Archipelago.
Nugget’s claims on the ground that Golden Nugget had no The court went even further in distancing itself from the
property or other protectable interest in the Golden Nugget index providers’ reliance on their favored precedents. With
common stock held by shareholders. respect to COMEX,the court disparaged the index providers’
The Archipelago court treated the shares in an ETF as contention that the Second Circuit’s ruling favored their posi-
though they were shares of common stock in a corporation tion: “the [Second Circuit’s] ruling [in COMEX], expressed in
being sold in the secondary market. This was so despite the three separate opinions, reached no conclusion as to the mer-
fact that the prices in the secondary market for QQQ shares its.”32 The court also made clear that, for the Second Circuit
cannot be set without reference to the index created by NAS- at least, the question of whether CBOTwas decided correctly
DAQ, as “the Index is publicly available information and those remains open:
who use it to set the price for the QQQ shares are L i ke COMEX, [CBOT] involved a defendant’s attempt to
investors,”26not the exchanges that facilitate trading in such c reate index futures that would allow investors to spec-
shares. Interestingly, NASDAQ relied upon COMEX and CBOT ulate directly on the value of an index copied from the
www.indexuniverse.com/JOI November/December 2006 13