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ETF Liquidity: Looking for a Reliable Provider

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Have you run across the acronym ETF before and wondered what it meant? Or are you curious about whether ETFs might be a good investment vehicle for you? In this post we explain how ETFs work and how they could be useful to you.


Exchange-traded funds (ETFs) are investment vehicles with a high potential for growth. ETFs now represent $7.74 trillion in assets. The total number of such funds just topped 7,600. This is a 304 percent increase in only ten years.

However, when it comes to investing one of the most important elements to consider is liquidity. So what is an ETF, 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, they also implement features similar to those of mutual funds. ETFs are traded on exchanges. A variety of assets back these funds, including stocks, currencies, metals, and other solutions.

When discussing the operating mechanics of ETFs, keep the following steps in mind:

  1. First and foremost, a fund owner purchases specific assets.
  2. An owner then manages a fund that is backed by these assets. The owner then sells shares to investors.
  3. Purchasing ETF shares does not provide an investor access to the assets bought by the fund’s owner. However, investors may receive dividend payments in the meantime. They can also reinvest.
  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 the 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, however, authorized partners (APs) acquire shares first and subsequently distribute them to brokerage firms.

Are ETF Shares Liquid?

Liquidity is an important characteristic for all financial instruments. Exchange traded funds are no exception. For both investors and brokers, ETF liquidity is absolutely critical. Investors must be confident in their ability to purchase and sell shares at market prices promptly. Likewise, brokers need to understand who can offer the most liquidity in order to persuade private investors to utilize their platform.

There are basically two loose categories that apply to the concept of an ETF:

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

Major players and authorized partners are primarily concerned with basic liquidity. However, individual traders are more concerned with the first liquidity level.


Who Are ETF Liquidity Providers?

ETF liquidity providers are intermediaries between funds and exchanges. They are approved partners and market-makers who buy shares from ETF funds directly. Exchanges and brokerage firms, in collaboration with liquidity providers, offer ETF shares to individual buyers and sellers.

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

Key Characteristics of a Reputable Liquidity Provider

Consider the following essential factors:

  1. Spreads. Minimum spreads (beginning at $0.01) are one of the qualities of a reliable service.
  2. Markets to access. Traders want to be able to access as many markets as possible. Therefore, 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.