Authorised participants by the numbers

Sep 14, 2023

The rapid growth of exchange trade funds (ETFs) is supported by a robust, dynamic “ecosystem” made up of many players. Among the key contributors to smooth ETF operations are authorised participants (APs). These financial institutions work with ETF issuers to create and redeem shares in the primary market. To learn more about the role of authorised participants, see Authorised participants and market makers. This article looks deeper into the Australian ETF ecosystem, to analyse the breadth and scope of the AP universe.

A BROAD, DIVERSE UNIVERSE

All iShares ASX listed ETFs are supported by numerous APs. On average, iShares Australian-domiciled ETFs have 11 “contracted” APs and 5 “active” APs (Figure 1). A contracted AP has an effective agreement in place with an ETF issuer, even if the AP does not regularly create or redeem ETF shares. An active AP has created or redeemed shares of an iShares ETF within the last year to July 2023.1

Not all APs are active at the same time. For example, some institutions may complete formal paperwork to become an AP so they can participate when they see opportunities to profit or provide liquidity for key client demand. This presence of contracted APs helps ensure vibrant competition exists to provide ETF creation and redemption services. If an active AP were to step away, another contracted AP could step in to execute creation and redemption activity—even if they hadn’t been active in the fund previously.

Figure 1: APs for Australian domiciled ETFs

APs for Australian domiciled ETFs

Source: BlackRock as at July 2023.
Active AP defined as an AP that has transacted with the fund in the last 12 months.


SIZE MATTERS

Because larger ETFs—those with more assets under management (AUM)—typically have higher trading volumes and client demand, they tend to be supported by a greater number of APs than funds with smaller AUM.

Large iShares ETFs with over A$1 billion in assets are supported by more active and contracted APs, and iShares ETFs that trade over A$3m daily also benefit from more support from active/contracted APs (Figure 2).

Figure 2: Average contracted and active APs by ETF AUM and trading value

Average contracted and active APs by ETF AUM and trading value

Source: Australia iShares ETFs, BlackRock as at August 2023.


A DIVERSE PLAYING FIELD

The breadth of the AP universe should alleviate any concerns that iShares Australian listed ETFs rely too heavily on a limited number of institutions. Indeed, total creation and redemption activity is spread across many APs. In total, 7 APs created and redeemed shares over the year to August 2023. The AP with the highest percentage of activity, accounted 26% of all ETF creations and redemptions by gross dollar value (Figure 3).

Figure 3: iShares Gross Primary Market flows by AP

iShares Gross Primary Market flows by AP

Source: BlackRock as at August 2023


ACTIVITY ON EXCHANGE EXCEEDS THE PRIMARY MARKET TURNOVER

APs are key contributors to smooth ETF operations; however, we should remember that trading on the secondary market is generally larger than the primary market. For ETF investors, this can mean reduced spreads and less trading in the underlying ETF basket of securities.

Based on data for one year to the end of July 2023, we estimate that the ratio of secondary market activity to primary market activity for iShares Australian listed ETFs is 1.9 (Figure 4), meaning that for every dollar created/redeemed in the primary market, $1.90 is traded on the exchange.

Figure 4: iShares ETF Primary and Secondary Market trading

iShares ETF Primary and Secondary Market trading

Source: Bloomberg, and iShares: Data for one year to July 31, 2023.
Primary market activity is estimated using the reported change in share on issue. For more information, see Authorised participants and market makers.


WHAT HAS CHANGED OVER THE LAST YEAR

With the growth of the ETF market in Australia by both assets under management and number of ETFs, it is not a surprise to see that the number of primary market orders by APs has increased to support the new and less established products (lower but growing AUM and trading). For iShares ETFs in Australia, in the year to July 2023 compared to the previous year, the biggest growth in number of orders is in international equity ETFs, supporting the asset growth and new products (Figure 5). An efficient and cost-effective primary market process with a diverse number of APs is key to supporting this growth.

Figure 5: Number of iShares Primary Market transactions

Number of iShares Primary Market transactions

Source: BlackRock as at August 2023


THE BOTTOM LINE

iShares Australia ETF creations and redemptions are spread over a diverse base of APs. iShares Australia has agreements in place with a multitude of APs, and while every AP is not always active in all funds at the same time, additional APs stand ready to step in when opportunities arise. Larger funds, by assets and by trading volume, may typically have more APs than smaller funds, but small funds take advantage of the scope of the AP universe. Overall, iShares Australia can use global AP relationships to bring an ETF ecosystem to the locally listed ETFs, creating a broad engagement by APs, supporting a healthy ETF ecosystem.2