hedging by market maker

Discussion in 'ETFs' started by saminny, Aug 2, 2010.

  1. saminny


    I have a basic question regarding the buying/selling of ETF by market makers. As I understand the market maker deposits the underlying basket of shares with the custodian bank and receives a creation unit in return. So at this time MM is long shares and long ETFs. When he sells ETFs to the market, he is short ETF and long shares. So he should be hedged at this time right? Why does MM buy underlying shares when he sells ETF to hedge short ETF position (as per some articles). Since if I understand correctly he is already long shares that are kept in custodian bank.

    Could someone explain how this hedging is taking place?

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