Measuring an ETP’s true liquidity

It is no secret that ETPs continue their dominant growth in popularity, as global ETP/ETF AUM reached a new high of $6 trillion in 2019. The combination of enhanced transparency, lower costs and increased liquidity has made them the preferred alternative to traditional mutual funds. Despite the increased awareness of these products, some general misconceptions still persist – especially regarding the topic of liquidity.

When most investors check data on liquidity, the steps are relatively straightforward. Check the bid price, the ask price, and the volume being traded. The smaller the spread and the higher the volume, the more liquid the product is. Simple, right? Yes – and no. In the case of a normal stock, the aforementioned is true. However, when considering the same for exchange-traded products (which include ETFs), the indicator has another layer to it.

Prior to exploring the depths of ETP liquidity, let us review a few key terms distinctive to these products:

    •     Authorized participant (AP) – Usually a large financial institution, like an investment bank that

interacts directly with the ETP issuer.

    •     Market maker (MM) – Financial institution that has a contract with the exchange to provide

constant bid/offer spreads throughout the day. In many cases, the AP is also the MM.

Unlike typical mutual funds and closed-end funds, ETPs have an inherent redemption mechanism, which helps keep the market price in line with its NAV. Like normal stocks, as the ETP price fluctuates throughout the trading day, the AP can step in and do one of the following:

    a.     If the market price > NAV, the AP can buy the constituent stocks and simultaneously

exchange them for ETP shares, which can then be sold to investors.

    b.     In the opposite scenario, where NAV > market price, the AP can purchase ETP securities and

exchange them for the constituent securities, which it will then sell on the market to make a riskless profit.

This arbitrage mechanism is available only to authorized participants who deal directly with the ETP issuer in the primary market. As retail investors only have access to the secondary market, they can then purchase and sell the ETP shares on a regulated stock exchange (like the London Stock Exchange or Euronext Amsterdam) through a broker as they would with any other stock. As ETPs are open-ended, meaning new units can be created/redeemed as needed, actual liquidity is more dependent on the underlying stock. For example, if an investor wanted to buy additional ETP securities on an exchange, the AP makes a transaction with the ETP issuer to create new units as needed.

Low volume on the actual ETP security does not indicate a lack of liquidity, and the investor is better served by checking the average daily volume of the stock(s) that constitute the ETP. As most of the underlying assets tracked by ETPs are highly liquid, most can draw tens of millions without having a negative impact on the liquidity of the underlying assets. This is essentially the case even if the ETP has a relatively small amount of assets under management.

Education Series: Single-Stock ETPs

Authored by

Leverage Shares

Share this:

Share on facebook
Share on twitter
Share on xing
Share on whatsapp
Share on telegram
Share on email

Related Posts


Generic filters
Exact matches only
Search in title
Search in content
Search in excerpt
Filter by Categories
Market Insights



By subscribing here, you agree with our Privacy Policy and you will receive our newsletters. You can unsubscribe at any time by following the link at the bottom of each newsletter.
By selecting ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Elective Professional Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.

Welcome to Leverage Shares

Terms and Conditions


If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website and to register your details so we have a record for the future, however we will not send you any materials directly.

If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Elective Professional Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.

This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2. The contents of this website have been approved under S21 of the Financial Services and Markets Act 2000 by Resolution Compliance Limited. Resolution Compliance Limited is authorised and regulated by the Financial Conduct Authority (FRN 574048).

This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.

Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.

This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.

United States Visitors

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.

Persons accessing this website in the European Economic Area

Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).

Exclusion of Liability

Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.

Risk Warnings

The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.

Leverage Investment

Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.


Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.

By clicking you agree to the Terms and Conditions displayed.