Authorized Participants (APs) are specialized financial institutions, typically large banks or brokerage firms, that have a unique and essential role in the creation and redemption of ETF shares. They also can be Market Makers.
What Do They Do?
👉APs are the only entities authorized to create new ETF shares or redeem existing ones directly with the ETF issuer.
👉They act as intermediaries between the ETF and the market by exchanging a specified basket of underlying securities (or assets) for ETF shares, and vice versa.
👉This process helps control the supply of ETF shares and keeps the ETF price closely aligned with the net asset value (NAV) of the underlying assets.
How They Work (Creation and Redemption Process):
👉Creation: When demand for an ETF rises and its market price exceeds the NAV, an AP will buy the underlying securities that the ETF tracks (e.g., Bitcoin or stocks), and deliver them to the ETF provider. In exchange, the AP receives newly created ETF shares, which it can sell on the open market, increasing supply and helping bring the ETF price back in line with NAV.
👉Redemption: Conversely, if ETF shares are trading below the NAV, the AP can buy ETF shares in the market and redeem them with the issuer in exchange for the underlying securities. This reduces the supply of ETF shares and helps push the ETF price back up toward NAV.
Why Are Authorized Participants Important?
👉They provide liquidity to the ETF market, ensuring investors can buy and sell shares without large price deviations.
👉They help maintain price stability and limit premiums or discounts between ETF market prices and the actual value of the underlying assets.
👉Their activities enable ETFs to function efficiently, combining benefits of mutual funds (diversification, professional management) with stock-like tradability.