Discussion paper
DP18234 ETF effects: the role of primary versus secondary market activities
High frequency traders (HFTs) dominate trading activity in Exchange Traded Funds (ETF). Their trading is independent of daily ETF mispricing and primary market activities. In contrast, primary market activities correlate positively with mispricing, revealing divergent trading strategies between HFTs and primary market arbitrageurs. While primary market activities can heighten volatility and illiquidity in ETF constituent securities, HFTs' activity is associated with lower bid ask spreads. The infrequency and minimal scale of primary market activities suggest that the benefits of secondary market activity in ETFs outweigh the negative impacts of primary market activity.
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