Authorized Participant

An authorized participant (AP) is a large financial institution — typically a major bank or market maker — that has a contractual agreement with an ETF issuer to create and redeem ETF shares. APs are the only entities that can transact directly with the ETF at NAV, and they play a critical role in keeping ETF prices aligned with their underlying assets.

How Authorized Participants Work:

Creation Process (when ETF trades at a premium):

1. AP buys the underlying basket of securities on the open market
2. AP delivers the basket to the ETF issuer
3. ETF issuer gives AP new ETF shares (a "creation unit," typically 25,000–50,000 shares)
4. AP sells new ETF shares on the exchange
5. Increased supply pushes ETF price down toward NAV

Redemption Process (when ETF trades at a discount):

1. AP buys ETF shares cheaply on the exchange
2. AP delivers ETF shares to the ETF issuer
3. ETF issuer gives AP the underlying basket of securities
4. AP sells the securities on the open market
5. Decreased ETF supply pushes price up toward NAV

Why APs Matter:

• Price efficiency: Keep ETF prices close to NAV
• Liquidity: Ensure ETF shares can be bought/sold easily
• Tax efficiency: In-kind transactions avoid triggering capital gains
• Arbitrage mechanism: APs profit from price discrepancies, which benefits all investors

Who Are Authorized Participants? Major institutions like Goldman Sachs, JPMorgan, Bank of America, Citadel Securities, Jane Street, and Virtu Financial.

Key Facts:

• Each ETF typically has 20–50 authorized participants
• APs are not obligated to create/redeem — they do so when profitable
• The process happens in large blocks called "creation units"
• Most retail investors never interact with APs directly