The primary market is the mechanism where Authorized Participants create new ETF shares or redeem existing ETF shares in predefined unit sizes directly with the ETF issuer. The secondary market relates to all investor activity that is traded on exchange or over-the-counter. The secondary market affords investors the ability to buy or sell as small as one share at any time during the trading session.
Primary market liquidity is a function of the average daily volume of the ETF’s underlying securities. Common practice is to measure primary market liquidity with a metric called implied liquidity.
Implied liquidity of an ETF represents the underlying liquidity that can be traded without having a material impact on the underlying securities’ price.
A common convention is to calculate implied liquidity with the 25% rule i.e. the trade size in the ETF that would become more than 25% of the average daily volume in the least liquid underlying security. This is not a ceiling on the amount of ETF shares that could be traded in one transaction but above this point it is advised to spread the trade over a longer execution timeframe.
Secondary market liquidity can be measured by looking at average daily volume of the ETF over a period such as 30 days.
Other useful metrics when analyzing secondary market liquidity are ETF spreads and market depth. Similarly to primary market liquidity analysis, the implied liquidity of the underlying securities of the ETF also determine the liquidity of the ETF when traded in the secondary market.
The most active market maker(s) in a fund will vary from product to product. We recommend to contact the Capital Markets Desk to connect you with the most active market maker(s) for your specific order.