What is an Authorized Participant (AP)?

Remember we said that an index was a recipe that showed what ingredients (stocks) to buy and how much to use? Well, Authorized Participants (APs) are the companies who take the raw ingredients and then bake them into a pre-prepared meal for you to eat - the ETF.

When the demand for ETF shares is very high and there are not enough shares available to buy on exchanges, an AP can buy the right amount of each stock, package them up and ask the ETF provider to create more shares to then sell on stock exchanges.

Similarly, when the demand for the ETF shares is very low and there are too many shares for sale on exchanges, the AP can reverse the process. This means the AP will buy the unwanted ETF shares from the exchange and unpack the ETF into the original stocks.

APs do this because they benefit from those trades when the price of the ETF and its raw ingredients diverges. Their activity and competition for this profit pushes prices back in line with the value of the raw ingredients. This means that APs presence allows all investors – big or small - to trade ETFs at fair prices on exchanges.

Examples of APs:

• Jane Street
• Flowtraders
• Virtu Financial