Since its inception, Israel A. Englander & Co. has set new industry standards for effective transaction execution, increasing the speed and decreasing the cost of transactions to improve customer service. Now, responding to the demand expressed by our clients, I.A. Englander has developed ADR NAVIGATOR, a proprietary, patent-pending internet-based electronic platform designed specifically to create liquidity, anonymity, fluidity and, most distinctively, a profit incentive in the ADR arbitrage market. I.A. Englander now makes it easier and less expensive to unwind ADR/ordinary positions versus bank depositary conversions and faster than both bank depositary conversions and competing crossing systems, allowing clients to reallocate capital more rapidly.

BACKGROUND

A constant, interactive dialogue with our diverse customer base propelled I.A. Englander to identify the conversion of local (ordinary or ORD) equity of foreign companies and the corresponding American Depositary Receipts (ADRs) as an extremely inefficient sub-segment of the equity market. ADRs are issued by four major U.S. banks (JP Morgan, Citigroup, Bank of New York and Deutsche Bank) for U.S.-based investors to purchase the equity of non-U.S. companies, without necessitating an interaction with a foreign exchange. An arbitrage opportunity naturally exists in the ADR market as a result of the discrepancy in pricing at any given time due to factors such as uneven demand, foreign exchange discrepancies or time zone differentials. An investor is automatically hedged with an ADR purchase (or sale) with the converse local equity sale (or purchase).

The inefficiency arises when an investor attempts to unwind his position. As a last resort, one of the four depositary banks can cancel ADRs or create new ones at a high fixed cost of as much as five cents per share. At this time, the existing ADR/ORD market offers only this type of manual conversion or, on a limited basis, an electronic platform utilizing crossing-cycles that provides neither continuous execution nor the complete transparency and impartiality that I.A. Englander’s ADR NAVIGATOR can ensure.

ADR NAVIGATOR

In response to our clients’ needs, I.A. Englander designed a groundbreaking platform:

• ADR NAVIGATOR ensures that crosses can be accomplished with instant point-and-click execution. That is, matching orders are automatically executed, eliminating trading lags and achieving the best possible execution price for our clients.*
• In addition, the ADR NAVIGATOR platform creates a truly “level playing field.” Orders in ADR Navigator are executed on a strict price/time/size priority, and, unlike certain competitors, I.A. Englander has no other interests that may compromise the anonymity of the process.
• I.A. Englander has designed a system that complements its core options-execution business by providing transaction costs that are up to 80% lower than standard ADR bank depositary conversion fees. Whereas bank depositaries and static ADR exchange brokers will charge an investor as much as a five cent per-share fee to cancel out his position, I.A. Englander charges just a fraction of that.
• A unique element of the ADR NAVIGATOR platform is the built-in price-improvement functionality. In every other market where ADR crossing takes place, the transaction occurs within a price-neutral model; that is, the bid-side is “even” wherever it’s posted. I.A. Englander integrated in the design of ADR NAVIGATOR the ability to incorporate a variable “premium” that should enhance the liquidity of the market by inducing into transactions holders of ADRs and ordinaries that may otherwise be indifferent to the form in which they own their securities.
• Furthermore, the premium functionality invites significantly more interest in the ADR conversion market by enticing participation by large market makers.
• Transactions with ADR NAVIGATOR will be cleared through Broadcort (a division of Merrill Lynch) and occur with a T+3 clearing cycle, an improvement over many countries that generally offer longer clearing cycles.
• Whereas existing models discourage participation by a wider group of market participants due to a complicated and expensive framework, ADR NAVIGATOR is a user-friendly platform easily installed with a JAVA application (available via an internet download). A highlight of the program provides the user with a “level 2” view; that is, one can see the bids and offers just outside the range where transactions are currently occurring. This allows an ADR NAVIGATOR user to extrapolate a broader sense of the market. In addition, the screen is customizable, based on, for example, the specific equity, the industry sector, or the country of origin. A user is also able to customize the “alert” feature to provide up-to-the-minute information on changes in the marketplace.