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COVER STORY

Role of Market Maker in the 

ETF Market

A market maker, sometimes called a 
designated broker (DB), is a broker, dealer 
or investment firm that plays an essential 
role in how an ETF trades and ensures 
the continued and efficient exchange of 
securities between buyers and sellers. 
They do this in multiple ways, including 
providing liquidity to the market by selling 
units to investors and purchasing units 
when investors sell.

Creation and Redemption of Units

Market makers create ETF units by 
delivering a basket of underlying securities 
to the ETF provider in exchange for a block 
of units (typically 50,000 units) of the ETF 
with the same market value. These newly 
created ETF units represent an inventory 
that can be sold on the stock exchange to 
investors. When the market maker runs out 
of units (because the investing public has 
purchased them all), they simply repeat the 
process, beginning with purchasing and 
delivering additional securities.

This creation process can be reversed into 
a redemption process, whereby the market 
maker exchanges ETF units with the ETF 
provider, for an equivalent basket of underlying 
securities from the ETF. This sometimes occurs 
if many investors in an ETF choose to sell their 
investments at the same time.

Creations and redemptions allow the 
ETF to be in equilibrium, which means 
the number of units demanded by the 
marketplace approximates the number 
of units supplied – which ensures that an 
ETF's market price and net asset value 
(NAV) are closely linked.

Creations and redemptions 
allow the ETF to be 
in equilibrium, which 
means the number of 
units demanded by the 
marketplace approximates 
the number of units 
supplied – which ensures 
that an ETF's market price 
and net asset value (NAV) 

are closely linked.

INVESTORS

Cash

SECURITIES

ETF UNITS

ETF units

MARKET 

MAKER

ETF