An Authorized Participant (AP) is a registered financial institution that has an agreement with an exchange-traded fund (ETF) sponsor to participate in the creation and redemption process for that ETF. APs are typically large banks, broker-dealers, or other financial firms with access to the primary market.
To create new ETF shares, the AP delivers a specified basket of securities and any required cash to the ETF trust. In return, the AP receives creation units, which can be broken into individual ETF shares for trading on the secondary market. To redeem, the AP returns creation units to the sponsor and receives the underlying securities or cash. The baskets and cash exchanged are designed to reflect the ETF's current net asset value, or NAV (Net Asset Value), which is the value of the fund's assets minus its liabilities.
Authorized Participants help keep the ETF's market price aligned with the fund's NAV by arbitraging price differences between the ETF and its underlying assets. They also provide liquidity, enabling large blocks of shares to be created or redeemed rather than traded piecemeal on the open market.
APs are often market makers, large banks, or broker-dealers that have the capability to transact in the primary market and coordinate with ETF sponsors and custodians.
An AP may create creation units for an ETF when demand in the primary market increases, adding new ETF shares to the market.
Exchange-traded fund (ETF) · Creation unit · Redemption · Market maker · NAV (Net Asset Value) · Primary market · Arbitrage