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ETF effects: the role of primary versus secondary market activities

Author

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  • Comerton-Forde, Carole
  • Marta, Thomas

Abstract

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.

Suggested Citation

  • Comerton-Forde, Carole & Marta, Thomas, 2023. "ETF effects: the role of primary versus secondary market activities," CEPR Discussion Papers 18234, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18234
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    More about this item

    Keywords

    Liquidity; Arbitrage; Volatility; High frequency trading; Exchange-traded funds;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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