Authorised Participant (AP): The Key Player Behind ETF Liquidity

An Authorised Participant (AP) is a specialised financial institution—usually a large bank or market maker—authorized to create and redeem shares of an Exchange-Traded Fund (ETF). These participants play a crucial role in keeping ETF prices close to the value of their underlying assets, ensuring that investors can buy and sell ETF shares smoothly on the market.

In simple terms, an authorised participant acts as the bridge between the ETF and the market. When investor demand for an ETF increases, the AP can create new ETF shares by buying the underlying assets (such as stocks or bonds) and delivering them to the ETF provider in exchange for new ETF units. Conversely, when demand falls, the AP can redeem ETF shares by returning them to the fund and receiving the underlying assets in return.

Example:
Suppose an ETF tracks the S&P 500 index. If the ETF’s market price rises slightly above the value of its underlying holdings, the AP will buy the individual stocks that make up the index and exchange them for new ETF shares. This increases supply and helps push the ETF price back in line with its true value. Similarly, if the ETF price falls below its net asset value (NAV), the AP can redeem ETF shares for the underlying stocks, reducing supply and stabilizing the price.

Real-Life Scenario:
Major financial institutions such as Goldman Sachs, JPMorgan, and Citigroup often act as authorised participants. Their ability to create and redeem shares in large blocks—called creation units (often worth millions of dollars)—keeps ETFs liquid and efficiently priced. Without APs, ETF prices could drift far from the value of their underlying assets, making them less reliable investment vehicles.

Common Misconceptions and Mistakes:
A common misconception is that authorised participants are fund managers. In fact, they don’t manage the ETF’s portfolio; their job is purely to facilitate liquidity and price alignment. Another misunderstanding is that all brokers can act as APs—only institutions that have a formal agreement with the ETF issuer can do so. Additionally, retail investors cannot directly create or redeem ETF shares; they can only trade existing shares on the market.

Related Queries Investors Often Search For:

How do authorised participants create and redeem ETF shares?

What is a creation unit in ETFs?

Why are authorised participants important for ETF liquidity?

Can regular investors become authorised participants?

How do APs help maintain ETF price stability?

In Summary:
An Authorised Participant (AP) ensures that ETFs remain liquid, efficiently priced, and closely aligned with their underlying asset values. By creating and redeeming ETF shares as needed, APs maintain market balance and enable millions of investors to trade ETFs easily and fairly every day.