Authorised participant

A firm permitted to create and redeem exchange-traded fund units in large blocks by delivering or receiving the underlying basket of securities.

Example

A creation unit might be 50,000 fund units, exchanged for the corresponding basket rather than for cash.

Important

These firms act for their own profit, not as a guarantee. When executing the basket becomes expensive or impossible - a closed or disorderly underlying market - the mechanism slows and the gap to net asset value widens, which is precisely when a holder most wants it working.

Related terms

• Creation and redemption — The wholesale mechanism by which large blocks of exchange-traded fund units are issued in exchange for a basket of the underlying securities, or cancelled in exchange for that basket.
• Arbitrage — Buying and selling two forms of substantially the same thing at the same time to capture a price difference between them.
• Premium or discount — The gap between an exchange-traded fund's market price and the net asset value of its holdings, expressed as a percentage of that value.
• Liquidity — How quickly and cheaply an asset can be converted to cash without moving its own price.

Lessons that explain it

• Two prices: what the holdings are worth, and what somebody will pay — Net asset value is an accounting fact struck at a moment. An exchange-traded fund's market price is a live opinion. The gap between them is sometimes a mispricing and sometimes the more honest number. (12 min)

All 578 terms in the Investing glossary