"What is an EFT Authorized Participant (AP) or Participating Party"
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Participating parties or authorized participants or APs are people or, most likely, large investment firms, with the permission to create and redeem shares of an exchange traded fund.
The requirements are quite strict. You must have a lot of money and a lot of computer power and be approved by the particular ETF's trustee.
After you are approved as a participating party, you can buy a large amount of the investments covered by the exchange traded fund. Of course, in the proportion these investments take up of the given index. (Most indexes are weighted. Therefore, large companies take up more weight on such indexes than smaller companies.)
The authorized participants buy those shares and then deliver them electronically to the trustee. The trustee then issues new shares in the ETF based up on the current market price.
So if you deliver $50 million dollars worth of investments to the trustee and the current market price of the ETF shares is $100, then the participating party would receive 500,000 shares of the exchange traded fund.
The participating party can then sell those shares if they wish, but will sell them on the secondary market to ordinary investors
An authorized participant can also redeem shares if they choose. They present them to the trustee and receive the equivalent number of shares of the investment covered by the ETF, which they can then sell on the secondary market.
Over time, more shares have been created than redeemed, so there are a growing number of ETF fund shares trading on the second market. They don't dilute the value of pre-existing shares, however, since the amount of investments owned by the EFT trust fund is always equivalently increased before new shares are issued.
As of 2003, there were only about 30 authorized participants or market makers for all the ETFs then in existence.
Shares of the first Exchange Traded Fund are called SPDR or Spiders.
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