buying Sands China (1928:HK): why, trouble, and recent developments (ll)

As I mentioned in my last post, I think Fidelity has the best international operation for individuals in the US to buy foreign stocks. The commissions are very reasonable. The traders are generally knowledgeable. And the Fidelity software allows you to trade in real time in foreign markets—meaning at midnight Eastern time for Asia or 5am for Europe.

I also have a tendency to trade in relatively less-known names and have rarely had difficulties. When I moved my main foreign account to Fidelity, the firm wouldn’t accept my holding in 2432:JP, the Japanese social networking firm DeNa (pronounced D-N-A). The transfer people mixed this security up with the Dena Bank in India. I haven’t really kept up with developments in India, but at the time foreigners could only hold Indian securities if they were institutional investors who had registered with, and were approved by, the Indian government.  So it couldn’t be in a non-registered account.  It took quite a while to straighten that one out!

An (eminently skippable) aside on Schwab

I tried for a while to use Schwab for international trading, but had a very bad experience with them. I (stupidly) placed an order to buy a Hong Kong stock without checking on the commission I would pay. Instead of the $100-$200 I had expected, the bill came to around $2,000, or 4%-5% of the principal amount of the trade. Yikes! (To boot, the stock was one of the worst picks I’ve ever made.)

When I got no satisfaction from the Schwab trading department over the phone, I decided to test the “talk to Chuck” exhortation I’d seen in advertisements. I wrote a letter addressed to the personal attention of Mr. Schwab, detailing my complaint.

To be brutally honest, I had no case. I had left myself open to a $2,000 charge by not determining the commission rate in advance. On the other hand, this is not a great way to treat a customer.  The most straightforward interpretation of the bill was that Schwab didn’t particularly want my business, or at least this business.

Anyway, I got a call from a woman who said she’d look into the matter and get back to me. A month later, having heard nothing from her I wrote a second letter to Mr. Schwab, enclosing a copy of the first. I got a second call, from a different person. He said, somewhat indiscreetly :

–when we hung up, my first caller had marked my file “closed” and not done anything,

–he would explain to me how the commission and fees were calculated.  But he couldn’t get the numbers, commission + fees, to get as high as $2,000 (he said he’d get back, but it’s been over three years, so I don’t expect he will)

–people misunderstand what “talk to Chuck” means. It doesn’t mean anyone actually gets to communicate with Mr. Schwab himself–as taking the commercials literally would lead you to believe. Instead, it means that all Schwab employees are so imbued with the principles of their founder that talking with any of them is just like talking to Chuck himself. Given I deduced my two conversations with “Chuck,” that an axiom of the Schwab credo appeared to be to ignore my complaints, if not everyone else’s.  So I took most of my money away.

Back to Fidelity.

At about 10pm one recent night, I turned on my computer, logged onto the Fidelity site and placed an order to buy shares of 1928:hk. Whoops. Error message. The stock trades in lots of 400 and I had inadvertently entered an odd lot order.

Easy to fix. I added 200 shares to the order and hit enter again. (Incidentally, Fidelity allows you to settle the trade either in the local currency or US$ and lets you buy currency on the spot, if you need to.  Pretty neat.)

Error message again. This time Fidelity said this order had to be placed with a broker, because it had a Reg-SHO issue.

Strange. Reg-SHO has to do with short-selling and the uptick rule, so it didn’t apply to my trade.

I called the 800 number contained in the message.

Whoops. Fidelity’s international department is only open between 8:30 am and 4:30 pm, New York time.

I called again the next morning. The trader I talked with said I didn’t have a Reg-SHO problem. I had a Reg-S problem.

Hmm. My understanding of Reg-S is this.  It allows a company  incorporated in the US to issue new securities to foreigners without having to file a registration statement with the SEC. Such shares are electronically marked (in the old days, there’d be a warning written on the physical share certificate), and can’t be sold to Americans.  Well, 1928 is incorporated in the Cayman Islands (typical for Hong Kong stocks).  Its home market is Hong Kong.

The Fidelity trader politely said there was more to Reg-S than I understood, exactly what being open to question. But neither of us really knew for sure. He said he’d check with his third-party data source to see if the Reg-S warning was correct or not.

When I called back the following morning, another trader told me S&P and FT had both confirmed that 1128 is a Reg-S security.  Therefore, the company couldn’t accept the trade.

a “mature” reaction

For all their talk of rational fundamental analysis, most Wall Street people, myself included, are deeply superstitious. I think it comes from operating in an environment where so many factors are out of your control.

At any rate, at this point I realized that, for me, the trade was cursed and I shouldn’t do it.

Now, there is an unsponsored ADR for 1928. So you can buy it on the pink sheets. The bid-asked spread, which can often be as much as 10% on smaller stocks, was within a couple of percent the day I looked. But the ADR is, to my eye, very illiquid, meaning it might be tough to sell if you needed to.

Just out of curiosity, I phoned and emailed the LVS investor relations department to see if they could explain what was going on with 1928 and Reg-S. They had no idea what I was talking about.

What did I end up doing?

A secondary consideration in my thinking about 1928 was that the stock had sold off about 15% from its recent high. It had made up about half its losses while I was trying in vain to buy it, making it a bit less interesting. 1128 had also fallen by about the same amount and hadn’t rebounded. So I bought a little bit of that.  That didn’t help me with my too-many-eggs-in-one-basket problem  But I figured it would give me time to look at the 1928 ADR more carefully, to decide if I could put up with the liquidity risk.

My gut feeling, however, is what I said earlier—the trade is cursed and I’ll only lose money if I buy Sands China. You’ll be able to tell if I override my better judgment and buy the ADR. You’ll see the Hong Kong shares crater soon after.

Actually, as you may be able to tell, I wrote this on Wednesday December 1st.  Sands China was suspended from trading on December 2nd in Hong Kong, pending dissemination of information.  The news was that the firm’s application for approval to build on two sites in Cotai had been rejected by the government.  On Friday, the stock opened down about 5% but recovered throughout the day.

More on this development in my next post.

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