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July 31, 2004

Ordinary vs. Extraordinary: ADR conversions amouse click away

By Ingrid Eisenstadter

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  • Ordinary vs. Extraordinary: ADR conversions amouse click away

It was 10:30 in the morning one day last spring when Chris Mitchell, a buyside trader at Harding, Loevner Management in New Jersey, decided to purchase 20,000 shares of Spain's Bankinter SA. The bank trades in its home country in euros and in U.S. dollars on the Pink Sheets. That's where the bank changes hands as an American Depositary Receipt (ADR) in the U.S. Although it was the ADRs that Mitchell wanted, he could not buy them because the bank has little liquidity on the Pink Sheets. But, no problem; the Bolsa de Madrid would be open for another hour. So, on his Bloomberg terminal, Mitchell logged onto G-Trade's trading platform, ADR Direct, and bought his shares directly on the Spanish stock exchange. There Bankinter trades around a quarter-million shares a day.

"I purchased the entire balance in three executions in the local market," Mitchell says. "The whole thing took about 45 seconds." His trade moved the Spanish market by just two cents. To complete his trip, Mitchell clicked on "Create ADR" and just seconds later he had his U.S. shares. The ADR Direct platform does this trick in 23 foreign markets, instantly calculating for each one the foreign exchange rate, ordinary-to-ADR ratio, local taxes and exchange fees. Sheesh!

Back in the 1920s, making a foreign investment meant negotiating on a foreign exchange, in a foreign currency, in a foreign language. Do your own research. Then in 1927, Morgan Bank, envisioning a new market that could capitalize on facilitating foreign investments, created the first ADR. This, for example, enabled Americans to buy shares in the British retailer Selfridge, just as they would purchase any U.S. equity. To accomplish this, Morgan bought the foreign ordinaries and resold them - packaged as shares that could be bought in dollars, which paid dividends in dollars.

Today, of course, it's commonplace to trade ADRs with a mouse click. But only in the last few months, through ADR Direct, has it also become possible to actually convert foreign ordinaries into ADRs - or the reverse trip - with the same ease. The platform, a brainchild of G-Trade, a division of the Bank of New York, has signed up 80 customers since July of 2003, according to Andrew Levine, a G-Trade managing director. At present, ADR Direct, with its straight-through processing all the way, is regarded as the most hot-wired response to investors' soaring demands to go global.

For traders who use the Bloomberg terminal, which provides the only access to ADR Direct, the platform is available at no extra cost. If you haven't got a Bloomberg, however, get out your checkbook. A workstation costs $1,700 a month.

An Alternative

"Instinet terminals are free," says Mike Plunkett, by way of comparison. He's North American president of the New York-based institutional brokerage. Instinet calls its global platform "Newport" (Get it? new port?). It provides access to 40 markets globally and "can do so many things that sometimes it's too much for people," Plunkett says. Thus, Instinet has brokers who are available to shop for the best price and execute trades for their clients who are not the do-it-yourself sort, like the ADR Direct traders.