Authorized participants or APs are institutional firms who, in cooperation with the issuer of an exchange-traded fund (ETF), help provide liquidity for an ETF through the creation and redemption of ETF shares.
By agreement with the ETF issuer, APs have the right (though not necessarily an obligation) to exchange shares of the ETF for a basket of of the underlying assets of the ETFs such as stocks or bonds.
APs are not compensated by ETF issuers, but nonetheless have a profit motive to provide liquidity to ETF investors. When the market price of an ETF diverges from the net asset value of the underlying assets, APs can collect an arbitrage profit by buying/selling the underlying assets in the market while also creating/redeeming shares of the ETF itself.
- James Chen (Jan 9, 2018). "Authorized Participant". Investopedia. Retrieved May 30, 2020.