ADRs Uncovered: How Buy-Side Investors, World Class Market Makers and Trading Platforms Are Redefining Access to Overseas Equities

Over the last ten years, a little-known corner of the equity markets has more than doubled in size as the buy-side has sought new ways to access overseas liquidity and market makers have doubled-down on efficiencies.  American Depository Receipts, more commonly known as ADRs, are a kind of proxy for a foreign-listed equity that can be traded in the U.S. – in U.S. dollars – without incurring foreign exchange fees, requiring access to overseas trading desks or getting caught up in cumbersome cross-border settlement processes.  Though ADRs have been around since the 1920s, more recent market dynamics and trading protocols have made them both more accessible and more liquid than ever.

Tradeweb has been providing access to ADR trading for a few years and we’ve been seeing liquidity improve rapidly. To help market participants better understand the trend and where ADRs might fit into their own strategies, Tradeweb recently assembled a panel of leading experts on ADR trading, representing both the buy-side and dealer communities. The discussion, which featured Philip Giambanco, Head of Institutional ADR Sales Trading at Citadel Securities; Chris Johnson, Global Head of Trading at Schwab Asset Management; Jacob Rappaport, Global Head of Equities at StoneX Group Inc.; and Uma Seshamani, Institutional Sales and Trading: ADRs, Equities and ETFs Specialist at Jane Street, was moderated by Tradeweb’s Head of Global Equities, Adam Gould.

Why ADRs, And Why Now?

Several factors have driven the recent growth of the ADR marketplace. As StoneX’s Jacob Rappaport explained, the ADR markets have grown considerably more transparent over the last several years: “Historically, ADRs lived in this dark corner of the market with pink sheets and penny stocks that people didn’t know about. But when FINRA’s OTC Reporting Facility (ORF) came into effect about 10 years ago, we started to see things break out. This made the market more accessible and brought more transparency. As a result, the space has grown roughly 2.5 times in size at an 11-15% compound annual growth rate.”

“The space has grown roughly 2.5 times in size at an 11-15% compound annual growth rate” – Jacob Rappaport

Jane Street’s Uma Seshamani further explained the bifurcated nature of the ADR marketplace, which consists of both sponsored ADRs, which are created through a partnership between a depository bank and the underlying foreign company, and unsponsored ADRs, which do not require any formal relationship between the depository bank and the listed company. “Sponsored ADRs can trade listed on exchanges or over-the-counter (OTC), while unsponsored ADRs can only trade OTC.” She then noted that there are some incremental differences in the liquidity profiles and trading costs associated with both, adding that market makers will typically work with their clients to close those gaps. “What market makers have done more recently is provide that transfer of liquidity from the underlying into the ADR in our pricing. We really look at ADRs as a construct of our globally-oriented centralized approach to managing risk, so we’re going to look at these ADRs from that global liquidity profile and provide that transfer in our pricing to the ADR,” she added.

“We really look at ADRs as a construct of our globally-oriented centralized approach to managing risk.” – Uma Seshamani

Of course, the ability to trade ADRs OTC electronically has also fundamentally improved liquidity and efficiency. As Tradeweb’s Adam Gould explained, “One of the things that’s been so interesting about watching this product grow on Tradeweb has been the variability in pricing. Execution on our platform has been 13 cents better than the National Best Bid Offer (NBBO) for 2023, and 2700% the size.”

“Execution on our platform has been 13 cents better than the National Best Bid Offer (NBBO) for 2023, and 2700% the size.” – Adam Gould

Market Drivers

There have also been several market drivers behind the trend. As Citadel Securities’ Philip Giambanco explained, “One of the macro trends we’ve been seeing recently has been a broad rotation out of China. One market that has seen inflows has been Japan and a large part of Japanese ADRs trade OTC, versus listed. We’ve also seen the European luxury sector traded as a play on Chinese consumer demand. Lots of those names trade OTC as well and when you look at their liquidity profiles, on-screen liquidity can often be deceptive.”

Schwab’s Chris Johnson, the lone buy-sider on the panel, echoed that sentiment, explaining that the growth of registered funds, separately managed accounts and even retail investors looking to get exposure to overseas companies have helped to drive adoption of ADRs. “If you look at the constraints associated with trading locally in a foreign country in local currency, there are costs associated with registration in that country, foreign exchange costs, settlement challenges – there is a laundry list of reasons why some might not want to do it. Then you look at the ADR for certain companies like Teva Pharmaceuticals or Alibaba Group, where the ADR is more liquid than the local market listing, and the ADR becomes very appealing to a wide range of investors.”

“You look at the ADR for certain companies like Teva Pharmaceuticals or Alibaba Group, where the ADR is more liquid than the local market listing, and the ADR becomes very appealing to a wide range of investors.” – Chris Johnson

Efficiency Wins the Day

The conversation also dove into details like the effect of time zones and overlapping market opening times on ADR liquidity, nuances in pricing and risks associated with corporate actions and cancelled deals. Ultimately, the panel concluded with unanimous agreement that the combination of increased transparency in the market, along with the efficiency of trading electronically OTC has made ADRs an increasingly valuable tool for accessing foreign markets. Citadel Securities’ Giambanco summed it up best: “Putting market makers in competition is going to yield a better price, and you get to fulfill your best execution mandate. Whether we’re auto quoting, and even when we’re not, RFQ is always faster, more efficient, and transparent.”

“Putting market makers in competition is going to yield a better price, and you get to fulfill your best execution mandate. Whether we’re auto quoting, and even when we’re not, RFQ is always faster, more efficient, and transparent.” – Philip Giambanco

To view the full panel discussion, please click here.