Authorized participant – What is it, definition and concept

That is, authorized participants are entities that are dedicated to buying all the securities that are part of an ETF, delivering it to the fund sponsor.

For example, if it is an ETF that replicates the Nasdaq Composite index, the participant will buy the shares that make up said index, based on the weight by market capitalization.

Also, the authorized participants, or AP by the acronym of its name in English authorized participant, they can create shares in ETFs when their demand increases.

However, when the demand for the negotiable fund falls, the AP develops the reverse process. Thus, it reduces the shares in circulation.

At this point, we must remember that ETFs are an investment vehicle that seek to replicate the behavior of the assets that make up a stock index, whether fixed income, variable income, currencies, raw materials or other financial assets.

That is, this replicated stock index would be the underlying asset. Therefore, if the price of the index goes up, so does the value of the ETF.

Authorized Participant Business

In exchange for delivering the securities that make up the ETF, the authorized participant receives a group of securities of equal value called a creation unit. These assets can be sold by the market participant for profit.

For its part, the fund sponsor is guaranteeing the necessary liquidity for the purchase and sale of ETFs that are in demand at a given time.

It is also important to emphasize that the action of the authorized participants allows the price of the ETFs to remain close to their net asset value.

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We must remember that the net asset value is the unit price of each unit in the fund at a specific time. It is also known as NAV by its acronym in English (Net Asset Value).

To calculate the NAV, the fund’s assets are divided by the number of shares that are circulating. This is a calculation that must be made periodically, since the value of the fund’s assets depends on the market prices of the assets that constitute it.

In other words, if we have an ETF that replicates an index, and the shares that make up this index rise in price, the net asset value of the fund will also increase at the time. And it is worth noting that the price of financial assets is in permanent movement.

Authorized participants will then allow ETF prices to remain in line with their net asset value. This is because they will reduce the ETF’s shares outstanding (or on offer) when the price of the ETF is lower than that of its underlying asset, and vice versa.

Let us remember that, unless there is an ETF offer, pressure would be generated so that its price stops falling (or even rises). This is because of the law of supply and demand.

Who are the authorized participants?

Authorized participants are typically large banks such as Bank of America, JP Morgan Chase, Goldman Sachs, and Morgan Stanley.

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