Definition
ETF Market Maker
An ETF market maker is a registered participant that continuously posts buy and sell quotes for ETF units on the exchange, providing on-screen liquidity and keeping the traded price close to fair value.
On Indian exchanges, market makers, often the same firms acting as authorised participants, quote two-sided prices for ETF units and hedge their positions in the underlying basket. Their activity narrows the bid-ask spread and dampens premiums/discounts to NAV, especially for less-traded ETFs.
SEBI and the exchanges have encouraged or mandated market-making arrangements to address the historically poor secondary-market liquidity of many Indian ETFs. A committed market maker is what allows a retail investor to buy or sell an ETF near its iNAV rather than at a punishing spread.
Related terms
- Bid-Ask SpreadThe bid-ask spread is the difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask), representing a core implicit cost of trading and a measure of liquidity.
- Authorised ParticipantAn authorised participant is a large institutional intermediary contracted with an ETF issuer that has the exclusive right to create and redeem ETF units directly with the fund in large blocks.
- Premium/Discount to NAVAn ETF trades at a premium when its market price is above its net asset value and at a discount when below, reflecting temporary imbalances between on-screen supply and demand and fair value.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.