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0 pointsRandomBK10y ago0 comments

The value of the ETFs closely follow the value of the indices or securities that the fund was designed to track. It is therefore very important for the two securities to be as synchronized as possible, which is where (some forms of) HFT comes in.

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3 comments · 1 top-level

emcq10y ago· 2 in thread

Makes sense! You need to minimize tracking error on the underlying basket of assets, and the faster you are the less error you have.

eru10y ago

emcq is sort-of right, that for buy-and-hold investors a small tracking error is OK, as long as it does not accumulate over time.

But once you have the nice deposit/receipt system set up to incentivise people to trade the tracking error away with arbitrage, you get a smaller and smaller tracking error for free.

vostok10y ago

It is not obvious to me that the error would not accumulate. In fact, the opposite becomes somewhat clear if one looks at similar products that differ mainly in their lack of an arbitrage mechanism.

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