Izabella Kaminska

Market Makers Now Serve as ETF Authorized Participants

Back in the day, Goldman Sachs was the premier Wall Street bad guy. The investment bank attracted endless scrutiny of the supposedly conflicting and asymmetric arrangements that powered its broker dealer operations. Key among these were its primary dealer arrangements. Today, that attention has shifted to market makers like Jane Street. Key to the perceived conflict is the privileged role these institutions often play as “authorised participants”. The AP term was entirely obscure to most journalists before I started writing about it, and frequently dismissed as an operational irrelevance. “Nothing to see here”. In reality it represents a new type of primary dealer relationship. Except there is a difference. While the Goldmans of this world operated as de facto APs to the New York Fed, modern market makers operate as APs to thousands of ETFs, which (when you deconstruct them) amount to pseudo miniature currency board that back their “units” (we used to call tokens units) with a plethora of different assets, swaps and other mechanisms. All these entities (including the NY Fed) have one objective. Keeping their units pegged to some sort of index. ETFs mostly track stock and market indices. Par (aka “the peg”) equals the index minus the management fee. How they achieve that is often not as transparent as you would think. The NY Fed’s objective is ensuring its tokens deliver returns commensurate with an interest rate that fluctuates based the decisions of its FOMC. The difference is that its rate shifts based on the price externalities over supply of their own units create in the market even if they achieve their target. The same thing does not happen with ETFs. The externalities are ignored and available to market makers like Jane Street to exploit. The analogy isn’t that ETFs are the Fed. It’s that both systems issue “units” to maintain a peg. When unit creation becomes a structural funding loop rather than a marginal arbitrage, price externalities accumulate somewhere. The question isn’t whether the trades close overnight. It’s whether the systemic supply effect of constantly reopening them alters price formation over time — and who captures that transfer.