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>ETFs not getting too dislocated from NAV is an important part of that because otherwise they become a useless hedging instrument.

Sure, but that's only if we consider NAV to be "true" worth. To your point with the lack of liquidity in the underlying wouldn't logic dictate that the underlying needs to "catch up" so to speak?

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In normal functioning markets, maybe? When stuff like the events of the past few months happen, markets just stop trading altogether. If there's thin trading in an already illiquid market, there's no mechanism that forces things to reprice. What you see as NAV did not reflect executable levels. That's why you saw bond ETFs trading at such a discount because those were the only things people were able to sell. In a lot of cases most people decided they'd rather short 25mm of an ETF at -x% discount and have it retrace to NAV par than sell 10mm bonds down -1.5x% and then the next 15mm at an even steeper discount. Crude example, not how bonds are quoted, and you probably would have to sell those bonds in way more trades than that but hope it serves as an example.

So, due to the liquidity issues the proxy market is essentially being used in place of the primary market and the Fed, understanding this better than I, opts to bolster this proxy market precisely because it is being used as a temporary primary market?

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