The roughly $8 trillion U.S. ETF market largely depends on three major companies.
Accredited participants (APs), a specialized type of broker-dealer essential to the ETF ecosystem, have not expanded in number despite the sector’s rapid growth. These APs play a critical role in ensuring the liquidity and efficient operation of all North American ETFs.
A Bloomberg analysis of more than 3,400 fund filings found that most U.S. ETF flows are controlled by three firms: Bank of America, Goldman Sachs and JPMorgan. In fact, for many funds, over 90% of all capital movements are controlled by these three APs. Surprisingly, as of the latest comprehensive data quarter, hundreds of ETFs rely solely on a single AP for their liquidity needs.
What does 2024 mean for a potential Bitcoin ETF?
Relying on a few APs may increase concentration risk in the Bitcoin ETF space. Given the highly volatile nature of cryptocurrencies, the efficiency and resilience of these major companies will be closely scrutinized, especially when it comes to managing high volume transactions and ensuring liquidity.
An oligopoly of existing APs could also affect the price and accessibility of Bitcoin ETFs. The company’s pivotal role in cash flow management could impact how these new ETFs are priced and traded, potentially impacting investor access and returns.
Most importantly, the SEC can take this focus into account in its decision-making process. Regulators may consider the need for a more diverse AP environment to ensure a strong and resilient market, especially given the new characteristics and potential risks associated with Bitcoin ETFs.
The SEC has been actively discussing this month with BlackRock and several other Bitcoin ETF applicants for potential approval in January. The current market rally is mainly due to the hype around Bitcoin ETFs. However, with such intensive operations in the current ETF market, the community should anticipate potential complexities and challenges for cryptocurrency-backed ETFs.