Schwab’s global trading service

My brother-in-law called my attention to the new global stock trading service that Charles Schwab is rolling out.  Although I’m by no means a fan of Schwab (more about this below) , this seems to me to be a potentially very useful tool, especially for anyone interested in investing in Asian stock markets.

my discount broker foreign trading experience

Personally, I now do international trading through Fidelity.  But I’m signing up for the Schwab service.

I used to use e-Trade, which was the first to offer online trading in foreign markets.  But I found its trading mechanism cumbersome.  Customer service was poor.  So I switched to Fidelity as soon as its foreign trading vehicle was launched.

why have a foreign stock account?

Why an international account when most foreign stocks are also traded in the US, either through listed ADRs or over the counter through the pink sheets?  For many large cap stocks, particularly European ones where trading hours for the local market and the US overlap, it’s not necessary.

But there are two important cases where trading in the local market is the far better alternative:

–for smaller, less well-known foreign stocks, the spread between a US market maker’s bid and asked prices may be several times as high (I’ve seen as much as 10x!) as what the market in the stock’s home country trading

–when a foreign market is closed, a US market maker will widen his spread, sometimes by a mile.  This is partly to account for the risk he may be taking in holding the stock until the foreign market reopens and he can sell; partly in reaction to your apparent desperation, or lack of experience, in wanting to unload the shares instantly.  Waiting an extra few hours to make a home market trade can many times get you a 5% better price.

Fidelity vs. Schwab

coverage

1.  Fidelity offers trading in 17 countries, Schwab 12.

Both trade in:

Australia

Belgium

Canada

France

Germany

Hong Kong

Italy

Japan

Netherlands

Norway

UK.

Schwab trades in Finland.  Fidelity doesn’t.

Fidelity trades in Mexico, New Zealand, Portugal, Singapore, Sweden and Switzerland.  Schwab doesn’t.

The coverage prize goes to Fidelity.  To my mind, however, unless you’re a small cap maven dealing in smaller markets, the difference between the two isn’t crucial.

fees

I haven’t done an exhaustive study.  For online orders, they appear to be about the same.  For orders placed with a trader, Schwab charges a percentage of the principal, Fidelity a set price.  For me, Fidelity would be cheaper.  One important caveat, though.

trader availability

Fidelity’s international traders work basically the same hours as their counterparts covering the US.  Schwab says it has traders on the job 24/7.

Schwab’s availability would potentially be a big advantage for anyone wanting to trade during Pacific market hours or during the European morning, times when Fidelity’s international trading desk is shut.

tradable stocks

Schwab has a list of about 3,500 “rated” stocks.  If the stock is not on the list, you’re out of luck.

Fidelity has a similar list, whose size I don’t know.  I’ve always been able to get a stock I want to buy onto the Fidelity list by asking.

Fidelity quirks

Both Fidelity and Schwab say they have real-time pricing during foreign market trading hours.  I have no relevant experience with Schwab.  I do know, though, that as soon as the US market closed on Wednesday, September 26th, all my Asian stocks repriced to their close on Tuesday, September 25th–about 36 hours (and one full trading day) earlier.  They do so every day, which messes up the percentage gains and losses shown online once Asian trading begins.  A minor annoyance, but very unFidelity-like.

A year so so ago, I decided to sell some Wynn Macau (1128:HK) in Hong Kong and use the money to buy Sands China (1928:HK).  I entered an online buy order for 1928 and got a screwy error message saying I wasn’t allowed to short the stock.  The next day I called the international trading desk and was told the issue was a Reg S security.  Reg S is the error message I got a minute ago when I tried to enter a buy order for 1928 through Fidelity.

That’s obviously wrong.  I dealt with Reg S often as a global portfolio manager.  It allows a US company to sell stock abroad without adhering to SEC registration requirements.  Ordinary US citizens are barred from owning such securities.  But Sands China is a Hong Kong company, so Reg S doesn’t apply.  Another small thing, but weird.

In contrast, I can buy 1928 through Schwab.

my embarrassing Schwab past (you can easily skip over the gory details and go to the last paragraph)

Five or six years ago, I bought my first–and, to date, only–Hong Kong stock through Schwab’s international trading desk.  Foolishly, I placed the trade without asking in detail about commissions.

When I received the confirm the following morning, I was shocked to find I had been charged brokerage of over $2,000.  That was 4% of the principal amount of the trade, far, far more than even a traditional “full service” broker would charge.  I had expected maybe $100, $200 tops.

I figured this had to be a mistake, so I called the trader I placed the order with.  He said the commission was correct.

I asked for the commission to be reduced.

I pointed out that Schwab’s out of pocket costs for the trade couldn’t have been much more than $25 (something I knew to be true from long experience).   The trader hadn’t apprised me of the huge commission involved.  The charge seemed to cut against everything a discount broker was supposed to stand for.

The trader replied by stating the law of the jungle–yes, he hadn’t told me.  But I had assumed Schwab would have low commissions and I hadn’t asked    …which was true   …not an inducement to doing any further business, but true.  On the brighter side, I had only been hurt financially.  The sun was out, I wasn’t broke, I wasn’t in the hospital.  I’d also learned a lesson.

my “Talk(s) with Chuck”

A day or two later, I saw a “Talk with Chuck” commercial on TV, extolling Schwab’s great customer service and, as I heard it, saying that CEO Chuck was interested in feedback from customers.  So, still in denial and persisting with the thought that the commission was a bizarre mistake, I wrote a letter to Mr. Schwab making my case.  I figured that at worst I’d get a politely-worded “no.”  And there was always the chance that the benevolent Chuck would overrule a misguided subordinate.  What did I have to lose?

A week or so later, I got a call from an assistant.  She said she would look into the trade and get back to me.

Two months went by without a word.  I sent a second letter to Mr. Schwab, attaching a copy of the first.

I got a call from another assistant.

He explained the first assistant had closed my case as soon as she hung up the phone–which is, naturally, why I had gotten no reply.    …oh.

He also told me that, like a lot of others, I misunderstood “Talk with Chuck.” It doesn’t mean the CEO cares to hear from customers.  Rather, all Schwab employees are so drilled in the founder’s business principles that speaking with any one of them is just as good as speaking with Chuck himself.

The voice of Chuck then said he’d explain in detail why the huge commission was in fact proper.  No reduction, but he’d show me why the charge was reasonable.  But he couldn’t make the numbers add up to anything remotely close to $2000.  He said he’d get back.  Naturally, he didn’t.

why this tale?

Despite my long experience, I made a rookie mistake.  Why dig it up again?

Two reasons:

It shows something about the way Schwab does business.  Not something good, as far as I can see.

It also says that to break the “fool me twice” rule, I must think the Schwab global trading service may have something no one else has.  I do.  But I’m going to tread very cautiously this time, until I can see the reality behind the Schwab promises.