ETF Liquidity: Looking for a Reliable Provider

Liquidity is an important characteristic of all financial instruments
Liquidity is an important characteristic of all financial instruments

Exchange-traded funds (ETFs) are investment vehicles with a high potential for growth. ETFs are now in charge of $7.74 trillion in assets. The total number of such funds has just topped 7600, representing a 304 percent increase in only ten years. When it comes to investing, one of the most important elements to consider is liquidity. What are ETFs, and why should a brokerage consider the concept of liquidity?

ETF funds and investment instruments

In general, exchange traded funds (ETFs) are all about the stock market; nevertheless, mutual fund features are also implemented there. ETFs are traded on exchanges, and the securities of a fund are backed by a variety of assets (aside from stocks, currencies, metals, and other solutions are possible).

When discussing the ETF’s operating mechanics, the following steps are mentioned:

1. First and foremost, a fund owner purchases specific assets.

2. An owner then manages a fund that is backed by assets bought and sells shares to investors.

3. Purchasing ETF shares does not provide an investor access to the assets bought by the fund’s owner. Dividend payments or reinvestments may be made to shareholders in the meantime.

4. ETF shares, like other stocks, are traded on stock exchanges. The price of a share may rise or fall depending on the overall worth of underlying assets.

What about private investors? Is it possible to buy shares directly from a fund? When you’re a significant player, the response is ‘yes.’ In all other circumstances, authorized partners (APs) acquire shares first and subsequently distribute them to brokerage firms.

Are ETF shares liquid?

Liquidity is an important characteristic of all financial instruments, and exchange-traded funds are no exception. For both investors and brokers, ETF liquidity is absolutely critical. The first must be confident in their capacity to purchase and sell shares at market prices promptly, while brokers need to understand who can offer the most liquidity in order to persuade private investors to utilize a platform.

The concept of an ETF may be loosely divided into two categories:

  • The first category (level) refers to the actual liquidity of an ETF fund;
  • The second category (level) includes the basic liquidity, being linked to underlying assets.

Major players and Authorized Partners are concerned with basic liquidity, whereas individual traders are concerned with the first liquidity level.

Who are ETF liquidity providers?

ETF liquidity providers are thought of as intermediaries between funds and exchanges. They are approved partners and market-makers who buy shares from ETF funds directly. ETF shares are offered for individual buyers and sellers by exchanges and brokerage firms in collaboration with liquidity providers.

Who are the top liquidity providers, and how can a brokerage business meet its traders’ demand?

Key characteristics of a reputable ETF liquidity provider

Consider the following essential factors:

1. Spreads. Minimum spreads (beginning at $0.01) are one of the qualities of reliable service.

2. Markets to access. Traders want to be able to access as many markets as possible, which is why market size matters.

3. Order execution time. Traders’ orders will be completed in milliseconds if they choose a reputable provider.

4. Technical support. The last but not least requirement is that brokerage firms must be able to contact an ETF liquidity provider at any moment they request it.

Apply the advice in this article to choose a liquidity provider that can help you take your business to the next level.