The mechanics are a swap, not a purchase. To create shares, an authorized participant deposits with the fund a basket of securities and other assets that the fund identifies that day, together with a cash balancing amount, and receives a block of new shares in return. To redeem, it hands back a block of shares and receives a basket. It can then hold those shares or sell them into the market, and the fund may charge a transaction fee on the exchange to defray the processing and brokerage costs and prevent dilution of existing shareholders. What the block contains, how big it is, and how the cash balancing amount is computed belong with the creation unit itself.
Who these firms are matters less than what motivates them. The SEC describes authorized participants as typically large broker-dealers, acting as principal for their own account or as agent for others, including market makers, proprietary trading firms, hedge funds and institutional investors, and taking a fee for processing creation units on their behalf. Nobody appoints them to keep prices fair. They do it because a gap between the share price and the value of the holdings is money on the table.
The arbitrage is worth following once, slowly, because everything else depends on it. Suppose ETF shares are trading below the fund's net asset value per share. An authorized participant can buy shares in the market, accumulate enough to make a redeemable block, and hand them back to the fund in exchange for the more valuable basket of assets. Its buying pushes the share price up; its subsequent selling of the basket pushes the basket's prices down; the two move toward each other. When shares trade above net asset value, the transactions reverse: the participant assembles the basket, deposits it for new shares, and sells the shares into the demand that created the premium. The SEC's summary is that this activity "provides a means to maintain a close tie between market price and NAV per share of the ETF, thereby helping to ensure ETF investors are treated equitably when buying and selling fund shares".
The arbitrage does not require the creation and redemption process at all, which is why it works even on quiet days. A trader who thinks an ETF is expensive relative to what it holds can simply sell the ETF short and buy the underlying assets, wait for the prices to converge, and close both positions. The SEC describes that route alongside the primary-market one, and notes that most ETF trading activity happens on the secondary market rather than through creations and redemptions.
The mechanism has limits, and the SEC states them rather than glossing them. The SEC's own view is that deviations between an ETF's market price and net asset value per share have generally been relatively small, but it also recognizes that "under certain circumstances, including during periods of market stress, the arbitrage mechanism may work less effectively", because in extreme volatility it becomes difficult for participants to price an ETF's holdings confidently or hedge their positions. Investors who trade in those moments can be the ones who pay for it.
The clearest way to see what authorized participants do is to look at products that have no equivalent. A closed-end fund has a fixed share count and no mechanism for creating or redeeming shares, so nothing forces its price toward the value of its holdings, and discounts routinely persist for years. An exchange-traded note holds no portfolio at all, and the issuer decides at its own discretion whether to create more notes, so a suspension of issuance can push a note far above the value it tracks. In both cases the missing piece is the same one.
