WHAT IS AN AUTHORIZED PARTICIPANT? Straight to the Point #STTP #130

In around two minutes you will know what is an Authorized Participant. You will get both professional definition and easy explanation. No intro, no outro, straight to the point.

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Authorized Participant is an organization that has a right to create and redeem shares of an ETF.

And if you want to know how ETFs are created and redeemed, feel free to watch one of my previous videos.

If you’ve seen my video about ETF creation and redemption process, you already know that an authorized participant is an integral part of it.

After a plan to create an ETF has been approved, an ETF manager must form an agreement with an authorized participant.

And under this agreement, an authorized participant must access required shares of companies in specified proportions in order to create an ETF.

For example, if a fund wants to create an ETF that will track the SP500 index, an authorized participant is responsible for acquiring all the shares of companies from the index in the same proportions.

Then an authorized participant sends these shares to a fund and in return receives shares of an ETF in a form of a creation unit.

Which later sold through the broker dealer on the stock exchange just like regular shares.

Authorized participants are important because they provide necessary liquidity for shares.

Additionally, authorized participants serve as a balancing mechanism within ETFs. Meaning, that when there is a shortage of ETF shares in the market, authorized participants create more.

And the opposite is true. Authorized participants will reduce ETF shares in circulation when the price of the ETF is lower than the price of the underlying shares.

Traditionally, authorized participants are market makers or any other large institutional investors. Specifically, they can be large banks, such as JP Morgan, Goldman Sachs, or Morgan Stanley.

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