ETF mkt maker #RBC

The market maker (a dealer) does mostly prop trading, with very light client flow.

Q1: creation/redemption of units?
A: yes the ETF market maker participates in those. When the dealer has bought lots of underlier stocks, it would create units; when the dealer has bought a large inventory of units, it would redeem them (convert to underliers)

Q1b: what’s the motivation for dealer to do that?
A: there’s profit to be made

Q3: restrictions on short position held by a dealer?
A: there are restrictions on how long you can hold a short position without a borrow (stock loan). For regular investors it could be a few days or within 0 sec. For a market maker, it is definitely longer, like 5 days

Q3b: how about size of the short position?
A: probably not. However, if a dealer has a huge short position and looking for a borrow, the stock loan could be very expensive.

Q: how is the bid or ask price decided in the market maker system? Is it similar to the citi muni system? In a competitive, highly liquid market, demand is sensitive to price.
A: fairly simple because the underliers’ bid/ask are well-known and tight. For a bond ETF, the spread is bigger.
A: inventory level in the dealer’s account is another factor
A: pressure in the market micro-structure is another factor. If you see heavy bidding and few offers, then you may predict price rise

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