BlackRock is looking for market makers for a Bitcoin spot ETF, Jane Street and Jump Trading are expected to participate

According to a report cited by CoinDesk from unnamed sources, trading giants Jane Street, Virtu Financial, Jump Trading, and Hudson River Trading have been in talks to act as market makers for BlackRock's potential Bitcoin spot ETF. What is the role of market makers in an ETF, and why is it so important?

What is the role of market makers?

ETF issuance involves a synchronous creation/redemption mechanism that allows Authorized Participants (APs) to exchange ETFs directly with the fund company using ETF components, which in this case is Bitcoin spot. As shown in the diagram below, when an ETF is trading at a discount, APs buy the ETF and simultaneously sell Bitcoin spot; conversely, they buy Bitcoin spot and sell the ETF when it is at a premium. Through arbitrage, ETFs are brought closer to the spot market price.

The complexity of the Bitcoin spot market exceeds that of regular stocks and requires market makers with experience in the crypto space. Therefore, BlackRock has enlisted the help of Jane Street, Virtu Financial, Jump Trading, and Hudson River Trading to act as AP market makers.

Hashdex discusses with SEC regulated Bitcoin spot trading by CME

Last week, Bloomberg ETF analyst James Seyffart retweeted an article about Hashdex's ETF application. To address the SEC's concerns about potential manipulation of Bitcoin on unregulated exchanges, Hashdex proposed using the Exchange for Physical (EFP) trading on the CME. It was reported that Hashdex and the SEC had met to discuss whether this strategy meets regulatory requirements.

EFP is a type of off-exchange trading conducted outside centralized exchange markets. It is a privately negotiated transaction between two parties that must be reported to the exchange after completion, commonly involving the conversion between futures and spot trades. As both parties must be CME members, all trades are monitored by the CME. The counterparties in these trades are the Authorized Participants (APs).

Hashdex's Bitcoin ETF, a hybrid of futures and spot, uses CME off-exchange trading to address manipulation concerns

SEC likely to review before November 17

According to compiled data, Hashdex Bitcoin ETF DEFI and Franklin Bitcoin ETF are recent issuers of Bitcoin spot ETFs. The SEC is expected to make a decision on their approval before November 17, earlier than other Bitcoin spot ETFs from BlackRock, Ark Invest, and others, which are mostly slated for review in mid-January next year.

However, with various asset management companies recently working on submitting revised documents and pre-arranging the crucial role of AP market makers, the optimism in the market seems well-founded.