“Since the price of an ETF is derived from the price of all the underlying securities, buying or selling a large amount of shares does not have the same impact [as buying an individual security], because those dollars are spread around to all of the underlying securities the ETF is holding,” Edward Rosenberg, head of ETF capital markets for FlexShares, said in the article.
With the proliferation of products, ETFs have become mroe specialized and niche. Consequently, it has become riskier and more expensive for market makers to hedge their exposure. Nevertheless, NYSE Arca has allowed some lead market makers to provide better quotes on specific products in exchange for greater incentives. Additionally, BATS and Nasdaq have adopted incentives programs in encouraging market makers to provide greater liquidity in smaller products. [BlackRock iShares Raising Liquidity in Smaller ETF Offerings]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.