ETF Education: What Are Authorized Participants?

Certified Participants (APS) is one of the main parties in the ETF creation/salvation mechanism center, and therefore, they play an important role in ETF liquidity. In essence, APS are ETF liquidity providers who have the exclusive right to change ETF stock supplies in the market.

When ETF wants to create new shares from its fund, whether it will launch a new product or meet the growing demand in the market, it turns into the AP, which may be a market maker or specialist or any other large financial institution. Basically, he is a person who has a lot of purchasing power.

The AP mission is to obtain the securities that ETF wants to keep. For example, if ETF is designed to track the S&P 500, then the AP will buy the shares in all & P 500 components in the same specified weights as the index, then deliver those shares to the ETF provider. In contrast, the AP provider gives a block of ETF shares of equal value, called the construction unit. These blocks are usually formed in blocks of 50,000 shares.

The exchange is made on one basis for one, a fair value. AP provides a certain amount of basic securities and receives the same precise value in ETF shares, at a price at the net value of the assets (NAV), not the market value in which ETF trading is made.

Both parties benefit from the transaction: The ETF provider gets the shares it needs to track the index, and AP gets a lot of ETF shares to resell them for profit.

The process can also work in the opposite direction. APS can remove ETF shares from the market by buying enough shares to form a construction unit and then deliver those shares to ETF source. In contrast, APS receives the same value in the fund’s basic securities.

ETP report decides. Before the launch, the source will set one or more AP to the box. More can subscribe over time. The most popular boxes will have dozens of APS.

The AP capacity helps to create shares and recover them to maintain the price of investment funds circulating in fair value.

For example, if the demand for ETF increases and the insurance premium develops, the APS enter to create more shares and pay the ETF price back with its actual value. If there is a rush for sale and debit development, the APS buy ETF shares in the open market and recover them with ETF exporters to reduce the offer.

In general, the more the APS number for a specific ETF, the better: the higher the strength of the competition, the ETF trading near its fair value.