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July 31, 2004

Ordinary vs. Extraordinary: ADR conversions amouse click away

By Ingrid Eisenstadter

Instinet brokers around the world will make real-time trades on behalf of clients who may be watching a baseball game on Sunday evening when the Japanese market opens, or who may be home snoozing when European markets are reacting to news at a time when it's still dark out in New York. And, Instinet is among the institutional brokers that provide research while G-Trade does not.

With the exception of G-Trade, converting an ADR to ordinaries or back again is manually-intensive at other firms, according to Levine. The manual steps include phone calls and e-mails. Now, advances in trading and technology are encouraging U.S. investors to trade more in ADRs.

In 1992, trading in ADRs accounted for 4.3 billion shares. Since then volume has grown every year, according to industry monitor IDC. At the end of 2003 volume had risen to 33.1 billion shares. For the first five months of this year, ADRs accounted for 19 billion shares. That puts 2004 on track for another record-breaking year.

While ADR dollar value did drop sharply along with U.S. equities during the recession - from $1.185 trillion in 2000 to $630 billion in 2003 - the ADRs are coming back faster. (ADRs and GDRs, the acronym for Global Depositary Receipts, are regarded as generic terms.) The Bank of New York, ranked as the biggest player in ADRs, notes that several of BoNY's indexes - the ADR composite, three international, a regional, and an emerging markets - all outpaced the S&P 500 comeback of last year.

Today, almost 12 percent of U.S. portfolios comprise foreign investments. The number of ADRs is down from its year 2001 high of 623 to 509 in 2003, but there's widespread agreement that the interest in investing globally is on the rise.

Over at Florida-based Empire Financial Group, Gerry Mastrianni, director of trading, agrees. "Demand is increasing," he says, "and most investors cannot deal in local overseas markets themselves."

The inexperienced investors buying into foreign companies on their own include, not just many portfolio managers, but some market makers and other traders. Mastrianni tells Traders Magazine, "There are firms doing business in ADRs that trade their ordinary shares through me."

"We use research from overseas trading partners," Mastrianni explains. "We have feet on the ground in all the foreign markets where we do business." Many trading firms do not have this background. These include many hedge funds that make up a big part of the ADR traffic. At Harding, Loevner, Mitchell points out that the firm manages $1 billion in overseas investments for nonprofit organizations, high net-worth individuals and retirement plans. Harding, Loevner traders do their own research.

But, for many traders, research is hard to find for both Pink Sheets ADRs and in overseas markets. With the exception of the more liquid, listed ADRs that do significant business internationally - ADRs such as Finnish Nokia, Japanese Sony and Swedish Ericsson - going global can be risky: Even when regional indexes show growth, individual country indexes may be shedding value. (Mastrianni notes that Swedish Ericsson trades more as an ADR than it does in its home country.)

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