Fidelity’s new international trading service

A little more than a week ago, Fidelity began a new service that allows qualified clients to trade international stocks online.  Although I haven’t used the service yet, it appears to be a substantial improvement over the company’s previous international equity trading offering, which required a call to the company’s international trading desk.  As far as I’m aware, Fidelity becomes only the second discount broker–after E*Trade–to offer a low commission, online method to buy and sell international stocks and currencies.  (The markets covered include Australia, Hong Kong, Japan, Canada and most of western Europe.)

The big advantages of the new structure are:

commissions, particularly for Hong Kong trades, are a lot lower;

you don’t have to call a trading desk to place orders; and

you can hold foreign currencies in your account.

What investment conclusions can we draw from this?

1.  Fidelity must have been seeing a big increase in client demand for buying individual foreign stocks, for a long enough time and in enough volume to justify making the investment in computer systems to support the service.  Fidelity must also think that this new-found interest won’t go away any time soon.

2.  Many Fidelity customers must want to diversify away from having cash in dollars, since Fidelity is stressing the ability to hold foreign currency balances in accounts.  Of course, meeting clients’ currency needs can be very profitable.    For currency trades under $100,000, for example, Fidelity charges the spot rate +100bp.  For a retail trade, I think this is a decent deal.  But Fidelity, which can aggregate client currency orders, may be able to trade at very close to the spot rate.

3.  Clients must have been really unhappy with the former system, which other brokers still use.  I know I was.  Fidelity used to rely on US-based market makers operating through the pink sheets for trades under $50,000.   There, bid-asked spreads can be as high as 10%–in other words, as much as 10x-20x what they would be in the local markets.  I can’t imagine many clients being thrilled with this sort of execution.  And at least in part, clients would likely blame Fidelity.  (My pet peeve:  older computer systems were set up with the US stock market in mind, and with commissions figured in a certain number of cents–usually around 4¢–per share.  That would be a bargain in a place like Switzerland.  But in Hong Kong, where customs are different and important stocks can trade for the equivalent of US$1-2 per share, Fidelity’s commissions each way for a trade in the local market could amount to 4% of the principal.)

4.  The pink sheets must be vulnerable. The competition, the pink sheets, does a land office business in foreign stocks with a pretty poor product for all but the most highly liquid equities.  The new international service could be a substantial source of new customers and trading revenue for Fidelity, which gets to be a hero at the same time, for offering a far superior trading platform.

Where are people getting their information about foreign stocks?

Fidelity intends at some point to provide information on foreign companies through a third-party service, similar to what it does for the US (good luck in finding someone competent!).  Most major foreign companies have elaborate websites, where the basic facts are available, as well as IR departments able to answer at least some questions.  Local newspapers are available online.  And, of course, there’s the Financial Times.

I’ve been toying for some time with the idea of starting a service that would provide in-depth analysis and recommendations for foreign (and maybe one or two US) stocks I like.  Now that Fidelity is providing an easy way of acting in foreign markets, I’ve got to take the thought more seriously.  I’d appreciate any comments you might have.

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