# Redemption

Redemption

1. AP buys ETF shares from market
2. AP delivers ETF shares to the fund
3. AP receives new ETF shares
4. AP sells ETF shares in market

**Q: Why redeem?**\
A: Fill orders / Reduce inventory / Take advantage of arbitrage opportunities

<mark style="color:red;">**Step 1**</mark> The Investor decides to sell their ETF shares on the secondary market:
\
• If there is market demand, the shares are sold on the market.
\
• If there is low demand, the AP gathers up enough shares to create a redemption unit.
\ <mark style="color:red;">**Step 2**</mark> The AP puts together a redemption unit and delivers it to the ETF sponsor in the primary market.
\ <mark style="color:red;">**Step 3**</mark> The ETF sponsor redeems the ETF shares for the individual securities that make up the shares and delivers them back to the AP.
\ <mark style="color:red;">**Step 4**</mark> The AP can sell the individual securities in the secondary market for cash.

ETF Redemption Process

1\. John goes to his broker and gives him the order to sell 500,000 shares of the ETF.\
2\. The broker buys the ETF shares from John at an agreed-upon price.\
3\. The broker determines if a redemption is necessary due to the decrease in demand and is now long the ETF since John sold the shares back to him.\
4\. The broker then sells the basket of securities held by the ETF to hedge his position and is now short the basket, long the ETF.\
5\. The broker delivers the ETF shares to the ETF issuer, initiating a redemption.\
6\. The broker receives the basket of securities from the issuer and flattens out the short basket position.


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