The U.S. ETF market, valued at approximately $8 trillion, largely hinges on three key firms. 

Essential to the ETF ecosystem, authorized participants (APs), a specialized type of broker-dealer, have not expanded in number despite the sector’s rapid growth. These APs play a crucial role in ensuring every North American ETF’s liquidity and efficient operation. 

Bloomberg’s analysis of over 3,400 fund filings reveals that most U.S. ETF flows are managed by just 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. Astonishingly, several hundred ETFs rely solely on a single AP for their liquidity needs, based on the latest comprehensive data quarter.

What does it mean for the potential Bitcoin ETFs in 2024? 

Relying on a few APs could introduce heightened concentration risks in the Bitcoin ETF space. Given the volatile nature of cryptocurrencies, the efficiency and resilience of these key firms will be under scrutiny, especially in managing high-volume transactions and ensuring liquidity.

The existing oligopoly of APs may also influence the pricing and accessibility of Bitcoin ETFs. The firms’ pivotal role in cash flow management could impact how these new ETFs are priced and traded, potentially affecting investor access and returns.

Most importantly, the SEC’s decision-making process might consider this concentration. The regulator could consider the need for a more diversified AP landscape to ensure a robust and resilient market, especially given the novel nature and potential risks associated with Bitcoin ETFs.

The SEC has been actively discussing with BlackRock and several other Bitcoin ETF applicants this month for a potential approval in January. The current market rally has been largely attributed to this hype of Bitcoin ETFs. However, with such concentrated operations in the current ETF market, the community should anticipate potential complexities and challenges for crypto-based ETFs.