ETF sponsors usually elect the investment strategy and define a fund’s goals and objectives. They also spearhead the marketing and distribution efforts for the ETF.
Authorized participant
The authorized participant or “AP” is a broker-dealer that makes a bid-ask market in the ETF shares, and initiates the creation and redemption in ETF shares. APs are charged with maintaining ETF liquidity in the market based on information they receive from the exchange.
Examples of APs in the market today include institutions and banks such as Bank of America Merrill Lynch, Citadel Securities, Morgan Stanley and Goldman Sachs.
Market maker
Similar to an AP, a market maker makes a bid-ask offer spread in ETF shares on the exchange where the ETF is listed. The difference between the two parties is that the market maker commits to continuously providing a bid-ask offer, whereas an AP can decide it doesn’t want to participate for a period of time.
Cantor Fitzgerald is the lead market maker that Nottingham currently has partnered with.
Custodian/transfer agent/fund accountant
A key difference between ETFs and other types of funds is the “baskets” of securities that are used in creating and redeeming ETF shares. In a creation, the AP will deliver a basket of securities and oftentimes a portion in cash in exchange for ETF shares, to cover shares the AP has sold in the open exchange.
To accept securities in lieu of cash requires special capabilities through the Depository Trust Company system for electronic delivery of securities, available only to DTC participants. Only a limited number of bank custodians offer this capability.
Because the ETF shares are issued in exchange for the securities, the custodian is in the best position to also serve as the transfer agent for the ETF, creating new ETF shares on the ETF books in exchange for a like value of securities.
Nottingham works with BNY Mellon in the capacity of custodian and transfer agent.
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Exchanges
ETFs are traded on exchanges just like common stocks and closed-end funds. The role of the exchange is critical in providing the mechanism for making ETF shares available to investors and offering liquidity for investors ready to sell their ETFs. The exchange plays the role of updating the market value of the underlying securities on a continuous basis, providing important information to the AP and market maker for their bid/ask spread in the ETF.
ETF exchanges include BATS, Nasdaq and the New York Stock Exchange. Nottingham is currently enjoying a relationship with the NYSE to serve as its primary exchange.
White-label issuers develop and maintain all of the relationships described above. Developing the relationships alone is a multiyear process, which a white-label issuer is in a unique position to help reduce significantly. There are also attractive economies of scale and pricing of services available to white-label issuers because service providers and other vendors have the opportunity to work with multiple funds under a white-label issuer’s umbrella.
If you want to learn more about how Nottingham has cultivated relationships with the who’s who of the ETF industry and how we can leverage those relationships for your ETF, click here.
This article has been republished with permission from Nottingham.