An authorized participant (AP) is an organization that ensures that ETF prices stay aligned with the value of their underlying assets. They are large banks such as GS, BAC, JPM, etc. They achieve this via the process of creation and redemption of ETF shares, which allows them to benefit from an arbitrage opportunity.
If an ETF’s price is higher than its Net Asset Value (NAV), an AP will purchase the underlying securities and bundle them into “creation units” (blocks of 50,000 shares) and exchange them with the ETF issuer for new ETF shares at the NAV. The AP can then sell the ETF shares, benefiting from the difference in price.
Conversely, when the ETF trades at a discount, an AP will reduce ETF shares in circulation by the price of the underlying shares.
The creation and redemption mechanism that keeps the price of an ETF aligned with its underlying net asset value (NAV)
