Canadian regulators consider measures to boost ETF market making amid growth challenges

The Ontario Securities Commission’s (OSC) recent study of the Canadian exchange-traded fund (ETF) market and a subsequent Canadian Securities Administrators (CSA) consultation have focused fresh attention on the role of market makers in maintaining ETF liquidity and protecting investors from pronounced trading dislocations.

According to the OSC report, ETFs supported by a greater number of market makers tend to display tighter bid-ask spreads and smaller deviations between market price and net asset value (NAV), while funds with limited market-making participation show wider spreads and reduced liquidity. The OSC’s analysis of trading from January 2019 through to the end of 2023 found that, as at December 2023, 71 ETFs , managed by five issuers and representing about 8% of listed ETFs , had only one authorized participant (AP), though these tended to be smaller funds accounting for less than 5% of total Canadian ETF assets. Nearly half of ETFs had eight or more APs, representing roughly 80% of total net assets in the study sample.

The link between the number of APs and price efficiency is supported by industry data. TD Securities’ work shows that in 2024 the average deviation between market price and NAV fell as the number of market makers rose: ETFs with one market maker averaged a 0.89% deviation, those with two averaged 0.73%, and those with three averaged 0.34%. TD also reports that the average number of active market makers per ETF increased from 2.5 in 2022 to 3.8 in 2024, reflecting growing market support as the industry expands.

How market making functions in Canada helps explain both the benefits and the limits of regulatory remedies. ETF issuers appoint designated dealers to seed and list funds; as Frédéric Viger, co-head of institutional ETF sales and a market maker at National Bank Capital Markets, explained, “The designated dealer is the one that provides the issuer with the initial capital , a minimum of $1 million , to launch the ETF and list it on an exchange,” and that dealer “becomes the lead market maker, ensuring that the ETF opens at the correct value and continues throughout the trading day to post buy and sell quotes that reflect its true price.” Other brokers may act as market makers at their discretion by posting continuous bids and offers to deepen liquidity.

Banks dominate Canadian ETF market making because of the technological infrastructure and capital committed to quoting and arbitrage activity. National Bank Financial’s Viger noted his firm acts as lead market maker for roughly 37% of Canadian ETFs and accounts for about 38% of trading volumes, a position the firm has sustained for several years.

Regulators and market participants have drawn attention to concentration and operational risks. TD warned that ETFs reliant on a single market maker “can see their bid-ask spreads widen dramatically , by up to tenfold , during unexpected outages.” The OSC’s analysis of stress episodes demonstrates the danger: at the onset of the Covid-19 market shock displayed spreads and price deviations from NAV increased by nearly 10 times normal levels, with the median daily deviation spiking to 119 basis points compared with around nine basis points in normal conditions, though spreads largely normalised within months.

Those dynamics underpin the CSA’s consultation on the ETF framework. Launched in June 2025, the consultation paper draws on the OSC study and international good practices to examine whether issuers should be required to enter agreements with multiple APs, to monitor the arbitrage mechanism and secondary-market liquidity, and to adopt policies and procedures for consistent oversight. The CSA explicitly notes that “engaging a diverse group of APs with different risk appetites and constraints increases the likelihood that at least one will maintain arbitrage activity,” and that additional APs can foster competition that helps keep spreads tight , a point issuers themselves reiterated in submissions, saying multiple AP agreements reduce the risk of informational advantages for APs with access to non-public portfolio details.

But causation is not straightforward. Market-makers and sell-side participants caution that low trading volume, limited arbitrage opportunity and confidentiality needs for actively managed strategies explain why some ETFs attract few market makers. As Viger observed, “An ETF that doesn’t trade much won’t attract market makers , and more market makers won’t fix that,” adding that it is trading volume and competition from natural buyers and sellers that ultimately narrows spreads. Commercial practices such as exclusivity arrangements between an issuer and a lead AP , used to protect portfolio confidentiality , are defended by market participants as legitimate managerial choices; some market-makers and issuers warned that banning exclusivity could raise barriers for smaller entrants.

Policy proposals under consideration reflect these trade-offs. Regulators are weighing whether to mandate a minimum number of AP arrangements per ETF, whether to prohibit exclusive AP agreements, and whether to require lead market makers to meet resilience and system-quality standards to reduce outage risk. TD Securities has also proposed considering compensation models to incentivise market makers to provide minimum levels of quoting and arbitrage activity even when direct profitability is limited; at present, no standardised compensation framework exists in Canada for that purpose.

Industry structure and rapid product proliferation complicate any intervention. TD Securities’ research and market reporting note the pace of new ETF launches , on average around 1.4 new Canadian ETFs per trading day in recent years , and the rising share of actively managed products, which often disclose holdings selectively for commercial reasons. That growth helps explain both the need for robust market-making capacity and the difficulty of ensuring it across a vastly expanding product set. Wealth management reporting for 2025 shows the Canadian ETF market continued to attract substantial inflows, with record absorption of liquidity in the first half of 2025, underscoring the system-wide importance of reliable secondary-market functioning.

Mandating more APs or market-making commitments would likely improve arbitrage efficiency for many funds but could raise costs and complexity for smaller issuers and nascent products. Regulators must therefore balance investor protection and market resilience with market-driven incentives that bring capital and quoting capacity to the most actively used ETFs. As the CSA consultation progresses, the question for policymakers will be whether rules, guidance on compensation and operational resilience standards, or enhanced disclosure and monitoring offer the most effective and proportional means to strengthen ETF liquidity without unduly limiting product innovation and market access.