Influence of the growing ETF industry on active investor relations work30 Fundamentals of passive investments and ETFs tor regarding an increase in efficiency Heinrich Jänner 2018 p 361 Investors place the order to buy a specific num ber of shares with the broker and from that point have no further influence in the creation redemp tion process Heinrich Jänner 2018 p 361 The ETF provider compiles a theoretical securities portfolio with the aim of replicating the performance of the reference index as closely as possible To replicate the underlying index of an ETF authorized par ticipants AP compile a basket of securities also called creation units and thus realize the securities portfolio through securities purchases The com position of the basket depends on the replication method In case of a full replication the underlying assets are replicated one to one The AP delivers the basket to the ETF provider and receives the ETF shares in the value of the delivered securities in return The process of forming new ETF shares and placing them on the secondary market is called creation Deutsche Börse 2018 p 74 Creation takes place when demands and consequently pur chases of an ETF increase This process ensures the tradability of the index as it can now be sold on the stock exchange Heinrich Jänner 2018 p 363 Vice versa ETF shares can be returned to the ETF sponsor and the basket of securities is given back to the AP during the redemption process Deut sche Börse 2018 p 74 A redemption is occurring in case of a decrease in demand of the shares resulting from a sell order from an investor Hein rich Jänner 2018 p 364 Unlike fund units at cor porations there is no redemption fee for investors when the units are sold Eibl 2008 p 18 In case of a synthetic replication an additional party the senior market maker is integrated into the process for the conclusion of the swap trans action He or she enters into a swap agreement with the ETF provider and trades the ETF against the baskets of securities Krautbauer 2015 p 62 An authorized participant AP is either a finan cial institution usually large banks e g Morgan Stanley or JP Morgan Chase or a more specialized market maker but never an individual investor An AP is able to manage complex securities set tlement and is entitled to either create or redeem shares during the creation redemption process An AP therefore has an agreement with an ETF spon sor giving the AP the right to create redeem ETF shares in the primary market An AP plays the role of an agent either on behalf of market makers or institutional clients Novick et al 2017 An AP ensures that the supply of ETF stock corresponds to its demand Boyde 2020a Hence the majority of the liquidity in the market is provided by APs Chen 2020 Furthermore an AP arbitrages an occurring difference between the fund prices and the value of its holdings narrowing the difference between the share price and NAV Net Asset Value Through the arbitrage process the AP earns money and dis counts in ETFs never actually occur Stevenson and Tuckwell 2019 pp 7 43 As a result APs have a direct influence on the price of the ETF which is therefore coherent with the NAV Boyde 2020a Market makers broker dealer ensure additional liquidity by providing two sided buy and sell quotations to clients Novick et al 2017 either on their own initiative at auctions or through quote requests from market participants Schnor renberg 2008 p 151 Whereas an AP ensures liquidity only in the primary market a market maker is also active in the secondary market Boyde 2020a They are usually the initiator of the creation or redemption of shares If an imbal ance of orders exists the market maker reaches out to an AP Market maker obtain long or short position in ETF shares through secondary market trading Additionally market makers can act as an AP by creating or redeeming shares themselves Novick et al 2017

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