What incentivises a Market Maker to arbitrage when NAV and ETF unit price are far apart?
Complete noob here and wanted to understand ETF better, so used ChatGPT for most of my questions (fingers crossed it gave me right answers lol). One thing I couldn't understand is what I mentioned in the title question. I'll give an example to show my understanding so far and then my question.
### ETF Creation:
Say Vanguard (the issuer) decides to create an ETF to track FTSE All World. So they buy $1000 worth of shares from companies X, Y, Z etc in proportion to what the Index says they allocation should be. They decide to release this into the market with a total of 100 units offering. So price per unit is $10 and they put in an OCF/TER or 0.22% to earn for themselves. I am assuming this is the NAV price.
### ETF Listing:
Next Vanguard pays LSE is list this and gives a ticker name of VWRP.
### ETF Trading:
Now Market Makers come in and buy this from Vanguard. Some buy 10 units some 20 units etc depending on their analysis. The highest bid is say $9 and lowest offer is $11 among them. LSE takes these and ignores the rest since it only lists the "best" bid and offer for the investors.
Now retail investors start buying through their broker. The demand for ETF rises so naturally the offer too. Say the offer reaches $14, though the NAV is still $10.
### Question:
Why would any market maker now try to arbitrage and bring this back towards the NAV? They are profiting by selling it at much higher than what they bought from Vanguard. But ChatGPT tells me that at this point, they will give Vanguard shares of companies X,Y, Z etc and ask it to make more units of VWRP in return which will obviously bring the offer price down as there's more supply. This was defined as "arbitrage".
Is there a governing body that forces them to do so? I can see one reason could be that because of high deviation from NAV, people will see this as tracking error or something and lose confidence in the ETF causing exodus (or failure of the ETF). But that will only make Vanguard suffer as they were the ones earning on OCF/TER. What incentivises the Market Makers to give a toss about it?