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September 30, 2003

A Better ADR Mousetrap?

By Nina Mehta

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  • A Better ADR Mousetrap?

Why the Costs of Trading Are Coming Down

ADR transactions are becoming easier and costs are now lower. At least that's what some interdealer brokers are promising.

But until recently, there was only one way to swap these American Depositary Receipts, or ADRs, for the underlying shares in the local market - or indeed to swap the locals for ADRs. A trader had to go back to the depositary bank and pay a nickel per share to convert the ADRs into locals, or the locals into ADRs.

Spotting a niche, interdealer-brokers sprang into action. To help clients avoid the conversion fees, they began matching up clients with opposing sides. If, for instance, a client who was long 100,000 shares of Nokia ADR wanted to convert them to the locals - and another client wanted to convert the local shares into ADRs - the interdealer-broker could arrange a swap.

There are now at least two electronic platforms angling to take a bite out of the voice-brokered swapbook business. And these new electronic services are putting downward pressure on transaction costs.

In February, J.P. Morgan, the bank that created ADRs back in 1927, rolled out the first online automated market for brokers, institutional investors and traders who want to swap ADRs and ordinary shares. It is called ADR Cross-Book Maximizer, or ADR MAX. This is a system that runs half-hourly crosses to match up counterparties.

The firm typically charges 1.5 cents per share for each side although price can move around based on the supply and demand. ADR MAX operates 14 hours a day, from 8:00 a.m. London time to 4:30 p.m. in New York. J.P. Morgan wouldn't disclose the share volume transacted.

This past summer, creditex, an online credit derivatives trading platform, launched ADR Swapbook, a real-time matching engine based on technology developed over the last four years. The system's online order book is based on price-time priority and operates from 8 a.m. to 6 p.m.

ADR Swapbook, like ADR MAX, keeps the identities of parties anonymous. When a match is made, a voice broker connects the parties to finalize the transaction. ADR Swapbook charges dealers and other users one cent per share per side. The firm said it executes a couple of swaps a day, although it has had days when it transacted more than one million shares.

"For their obvious technological advancements, these platforms will gather speed and momentum," said Gary Thompson, director of sales trading for Europe at SG Cowen, who noted that he currently does not use either system. "They're cheaper, manpower needs will be reduced, and they are more efficient, while still hiding your identity."

So what exactly will it take for more of the market to move to electronic platforms? Greater interest and volume in ADRs and the dissemination of information about these platforms, according to Hugo Rubio, international equities trader at Lazard Freres. He noted that both of the current platforms are efficient and useful for institutions.

Meanwhile, ADR agents are seeing a decline in revenues for the creation and cancellation of ADRs.