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Pricing an ETF always involves estimation. Most ETFs have a regular trading market that is only a few bps wide. Even in the US we often have ETFs with relatively illiquid underlyers but with an ETF that is priced tight. Market makers look for all kinds of proxies to model the fair value of ETFs. For international ETFs it will be a combination of ADR's, ...


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Your question has two parts (at least to me): How do you make money hedging ETF market making vs some other product? How do deal with the resulting positions? For #1, a very similar question was asked about the trading process just recently. See here for details: ETF Market Making - Locking profits via hedging For #2, here's the problem. Let's say you ...


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An ETF typically appoints one or multiple Authorized Participants (aka APs) which are allowed to buy and redeem ETF shares directly with the fund, by exchanging the fund shares against a basket of the underlying securities. These APs are often the market makers and their arbitrage involves managing an inventory of underlying securities and fund shares. I can ...


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I've worked in this industry for a while and have run ETF market making for quite a few years. It's very difficult to perfectly lock in profit as you detailed above. With fast equipment it can be done sometimes. But most of the time you really are just hedging to model - and there is risk in that case. For example, you might sell ETF X and then hedge ...


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