In this paper, we aim to analyse the exchange-traded fund (ETF) secondary market from the perspective of financial stability.
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Summary
The rapid growth in exchange-traded fund (ETF) markets creates potential risks to investor protection and financial stability.
Our analysis finds that ETF secondary markets are somewhat concentrated. However, a subset of Authorised Participants (the only market participants who can create and redeem shares in the primary market) are active in both primary and secondary markets and act as a buffer between these.
Only around a third of the net selling pressure in the secondary market manifests in redemptions in the primary market and this result holds across observed periods of market stress in our sample.
Looking in more detail at the high yield fixed income segment, we do see some features that suggest this market may be more fragile during periods of stress.
Finally, we document that ETFs with less liquid underlying are more heavily traded. This finding underlines the role of ETFs in creating opportunities for trading exposure to illiquid securities.
Authors
Matteo Aquilina, Karen Croxson, Gian Giacomo Valentini and Zhuowei Sun.
Disclaimer
Research notes contribute to our work by providing rigorous research results and stimulating debate. While they may not necessarily represent the position of the FCA, they are one source of evidence we may use to discharge our functions and inform our views. We strive to ensure research outputs are accurate, through checks including independent referee reports, but the nature of such research and choice of research methods is a matter for the authors using their expert judgement. To the extent that research notes contain any errors or omissions, they should be attributed to the individual authors, rather than the FCA.