What are Authorised Participants?
Authorised participants or APs play a vital role in ETF liquidity. As such, authorised participants are the centre of the ETF redemption or creation mechanism. APs are ETF liquidity suppliers that have the special right to change the supply of ETF shares on the market. When they spot a lack of ETF shares in the market, they create more shares. On the contrary, when there’s an excess supply of ETF shares on the market, they reduce the number of shares through creation and redemption mechanism.
How Do Authorised Participants Change the Supply of ETF Shares?
Before the launch, the issuer will allocate APs to the fund. There can be more sign-ups over time. It is common to see the most popular ETFs having dozens of APs.
Do APs Affect Liquidity?
An AP's skill to create and convert shares helps keep ETFs priced at a reasonable value.
For instance, if the demand for an ETF rises and a premium develops, APs make sure to create more shares and drive the ETF’s price back in line with its actual value. If there's an urgency to sell and a discount arises, APs purchase the ETF shares from the open market. APs will redeem them with the ETF issuers to cut supply.
Generally, having a greater number of APs for a particular ETF is considered better. The effect of competition has made it more likely to keep ETF trading around its fair value.
The task set forth for an AP is not necessarily an easy one. At times, the original market that they must access to change the supply of ETF shares is illiquid, or just difficult to access.
