Related Derivatives for Providing ETF Liquidity
The most common derivatives that help market makers provide liquidity in ETFs are options and futures. On a product where there is a very liquid futures market, many participants can trade the ETF versus the corresponding future. This will, in essence, supplement the underlying basket as a source of liquidity. Since the listed futures market is reasonably thin in terms of diversity of product, only the main indexes are involved. The S&P 500 Index against the ETF SPY, the Nasdaq 100 Index against QQQ, and the Russell 2000 Index against the IWM are frequently traded examples.
In addition, a liquid options market in the contracts of an ETF can lead to greater ETF liquidity as people trade the options ...
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