“ETPs have the unique advantage of interacting in both the primary (creation/redemption) and secondary (on-exchange) markets,” the analysts added. “What you see on-screen is not the only liquidity that you can get.”
Moreover, Baradas and Stone point out that the underlying basket is not the only source of liquidity.
“Statistical arbitrage liquidity providers may also create ETF markets though the relative value of correlated trading vehicles and related derivatives (swaps, options, futures),” according to the note.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.