A little while back, I wrote about a neat little hack I learned on Canadian Money Forum on saving money on converting Canadian dollars to US dollars or vice-versa. The hack allows you to convert Canadian dollars into US dollars by buying a highly liquid inter-listed security on the TSX, journaling it over to the US account and selling it on an US exchange. Or you could convert US dollars into Canadian dollars by buying an inter-listed stock on an US exchange, journaling it over to the Canadian account and selling it on the TSX. I recently had a chance to implement the hack in real life. Here’s my report:

I purchased 150 shares of Research in Motion (RIM) on the TSX at $67.10 (plus commission of $9.99) for a total of $10,074.99. I called TD Waterhouse and requested to journal the shares over the US account and immediately sold 150 shares of Research in Motion (RIMM) on NASDAQ at US$64.92 (minus commission of $9.99) for a total of US$9,727.86.

At that exact same time, my broker quoted an exchange rate of US$0.9560 for the currency conversion. At that rate, exchanging $10,065 would have netted US$9,622.14. The total savings net of two trading commissions of $9.99, bid-ask spreads and market risk (RIM moved slightly lower when I was on the phone): US$105.72.

A word of caution: don’t forget to double check that the trades were recorded correctly. I found that the first trade was cancelled and RIM purchased on NASDAQ — not exactly what I had instructed. It took another phone call later to correct the trades. Also, I could have reduced market risk by calling the broker first before purchasing RIM instead of first making an online trade and scrambling through the broker’s automated phone line. Still, despite the minor glitches, the conversion process went through rather smoothly and depending on how often or how much currency conversions you make, the savings could be substantial.

This article has 35 comments

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  2. If you like to use a broker as fx trader, IB is a good choice at low cost.

  3. which trading platform did you use to do the trade? you do not mention the fee of doing a phone call to request a trade (journaling),, were you able to avoid it? how?

  4. Canadian Capitalist

    @tony: I used TD Waterhouse for the trade. There is no fee for journaling the shares over from the CAD to USD account.

    The only explicit fee is the two trading commissions to buy and sell. The only hidden cost is the spread between bid and ask. You also take on a bit of market risk though market risk could very well also work in your favour.

  5. My understanding is that the safer way to conduct this conversion is…

    1) Short RIM in USD.
    2) Buy RIM in CAD.
    3) Now that the tense part is over, call the broker and do the journal (perhaps after settlement).

    Do you have a strong reason not to do it this way?

    I have not used this trick yet, but plan to at some point in the future. I am trying collect as much data as possible.

    • Canadian Capitalist

      @DG: I did not try to short sell first because I’ve never shorted a stock before and wasn’t sure if my cash account with TD Waterhouse is already set up to do that. If it can be done, I agree that shorting first and then covering the short is a much less risky sequence.

  6. Good move CC. You saved an extra $100. However, I like DG’s approach.

    Possible problems: can’t get hold of broker, trade(s) treated as “broker assisted”, “journaling” treated as internal transfer, couldn’t trade one side (halts, trippers, etc), traded on May 6 (i.e market risk), currency risk (check one penny move in currency), etc

  7. CC, I thought you switched to RBC a while ago. Am I wrong or did you switch back to TDW?

    • Canadian Capitalist

      @ghandy: I switched to TDW late last year because TDW has two very attractive features that RBC did not: e-Series funds and “wash trading”. Of course today RBC offers USD accounts, so one of the reasons is already not valid. In fact, I’d consider the RRSP USD account to be a slight positive for RBC Direct. If RBC Direct Investing ever offers the 1% bribe again, I’ll be tempted to switch again (while feeling just a tiny bit guilty of taking advantage of RBC).

  8. Neat approach — but why not use a stock with a lot lower volatility than RIM(M) to reduce the market risk?

  9. I’ve been using “norbert’s gambit” for several years, and have easily saved thousands in FOREX fees. The “best” broker in this regard is BMO Investorline for reasons detailed below (I used to have an Investorline account before switching everything to ETrade (now Scotia iTrade) so I could get into pre and after market trades).

    For investorline, regardless of registered OR non-registered account, it’s essentially the same process.
    1. if CAD –> USD
    2. buy CAD interlisted stock and choose to settle in CAD
    3. then sell same stock and choose to settle in USD
    4. if this is in a registered account (since you can’t actually hold USD, unless you have a RBC or questtrade account), you buy your desired USD stock, and then call for a wash trade before the end of the day.
    5. reverse instructions if you want USD –> CAD.

    The main benefit of Investorline is that EVEN in registered accounts, your buy/sell is almost instant – aka, you don’t have to expose yourself to the 15-20mins it takes to journal it over (and for those who say, what can happen in 20mins? well, look no further than last week’s fiasco)

    For ETrade (and likely other platforms), in non-registered accounts, the easiest, quickest (and therefore minimal market volitility):
    1. if CAD –> USD
    2. short US margin
    3. buy CAD margin
    4. journal next business day before it settles

    But the problem arises if you want to do FOREX in registered accounts. With Etrade and their trading platform, I can input both buy on TSX and sell on NYSE/NASDAQ with their Trading Desk Platform (but don’t execute yet), call customer service and when you’re through, tell them to journal it the moment you execute the buy, then I just keep clicking the “sell” until the system finally registers. This creates a 15-20 minute lag, so to minimize this, you want need to pick an interlisted stock with high volume and low volatility.

    Alternately, do your FOREX in your non-registered accounts and contribute to your RRSPs “in kind” to avoid the above nerve-wrecking experience.

  10. I should just add that in the above, for the Investorline, it is smart enough to know that if you want to settle in USD, it will move your sell proceeds to your USD margin.

  11. @DG: Just to clarify, in your process you don’t use RIMM? How is it possible to short RIM with USD without incurring a currency conversion?

  12. @Aaron: Oops, that would be RIMM that is shorted, not RIM. I was just following CC’s example to illustrate the short-sell approach; I make no judgement on whether RIMM/RIM is a good one to use.

  13. Canadian Capitalist

    @rw: I just picked a very liquid stock that will have narrow bid-ask spread so that the order will be filled right away.

    Does anyone have a suggestion for a liquid stock with low volatility?

    @LW: Thanks for your detailed comment. This is the first time I’m using “Norbert’s Gambit” but I’ll be using it more often now. A 1% saving each time you purchase a US stock is too good to pass up!

  14. >Canadian Capitalist said:
    >Discount brokers typically charge 1.5% or more for converting Canadian dollars into US dollars…

    I suggest you just switch to Interactive Brokers (Canada). Foreign exchange commission is $2.50 plus wholesale spread for amounts from $25,000 to $125,000. The wholesale spread on USD/CAD is usually .01c. So, for example, to buy US$100,000 would cost around US$7.50 at IB (commission plus half of the spread).

  15. @CC – at least 1%, and that’s only counting one way!

  16. @DG – you mention that doing a short first is a better approach, but in order to do a short you must borrow the shares from the broker and of course pay comission for that; wouldn’t that add to the cost of the transaction?

    @DavidS – I was checking IB demo for this, but, at the time of entering the order, it appears a comission box stating 2.5 (percentage ?).. it is a bit confusing…after the order was filled, there is no indication that such 2.5 was charged, but, this is demo only…. and you know what happens in real life.. have you used IB before? do you have a sample transaction? what type of account you opened for this? e.g. a general account thx!

  17. CC’s method of straight purchases and sales instead of using a short has the advantage of being available in both registered and non-registered account. As far as I know, you can’t short using an RRSP.

    As mentioned, you would have to have an account that allows holding US$ in the RSP. At this time, it would be RBC, Qtrade, and Questrade. Sounds like LW has a way of doing it with wash trades, which adds a level of complexity.

    All in all, a great method to avoid those pesky currency conversions. I also use contributions in kind for US stocks into my RSP, or I swap a US stock into the RSP while swapping out Canadian cash.

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  19. I did the same as CC but with Qtrade I had to wait three days (settlement) before journal in my Us account. I was very nervous during 3 days and I manage to be very lucky, and did a few $.

    I still don’t know why Qtrade ask me to wait settlement and CC ( with TDW) did not.

  20. speaking as the recent god-parent of this strategy – it only took me 3 attempts on canadian money forum during the past 8 or 9 months before i was finally able to capture CC’s attention on this useful strategy – which is one that i and others have routinely practiced for many years – and it turns out that norbert was the first or among the first to publicize the strategy – so it’s often known as norbert’s gambit …

    CC i’m surprised tdw did this for you since generally the big green will apply the no-shorting-against-the-box rules, which mean a client can’t go long and then short the same stock … although the reverse is OK (ie short first online in a margin account, then instantly buy long online, then phone when convenient for the journal.)

    LW is right when he says that bmo investorline’s website can handle both orders going in either direction. There is no need to phone whatsoever. Thru the bmo website, i recently sold some shares i’d bought on the amex in USD. I sold them in toronto, not to gain CAD, but because the tto bid price was better. For about 5 days, ie about 2 days past the settlement date, my account showed both a long position in USD and a short position in CAD for this stock. Eventually both positions neutralized, or flattened, and i was left with my canadian dollars. There were no fees or phone calls involved.

    the interesting thing about bmo investorline is that the stock in question happened to be one that is not marginable (too small.) Therefore i have no idea why the bmo system took the order so accommodatingly. I am always thankful for small mercies.

    btw one should use a margin account. Makes everything easier.

  21. @AR – 2.5 means US$2.50, IB’s minimum forex commission. This is indicated on their web page under “Fees”. I have an IB Universal Account, which is their normal multi-currency margin account for individual investors. I have been a customer since 2003.

    Consider a Canadian “discount” broker charging USD10 per USD equity trade and 1% for currency exchange. If an investor executes 20 trades to buy 200 shares for USD25, the equity commission would be $200. Then if the investor buys USD100,000 to cover the purchase, the forex commission would be $1,000, for a total commission of $1,200. If the equity spread is $0.02, the total cost would be $1240. Then, to sell the stock and buy CAD, it would cost around $1,240 again, for a total cost of $2,480. The stock would need to increase by around 2.5% for the position to begin to be profitable. And if the equity premium is, say, 5%, and if the position is held for one year, then around half of the equity premium is consumed by fees. This is not smart money.

    I don’t recommend short positions unless you are a very experienced investor. Since interest rates are now low, you must pay a borrow fee in order to short a security. The borrow fee depends on the demand for the security and any markup by your broker. I am now paying 2-4% (annual rate) for my shorts. Short positions may be bought-in with very short notice (hours). Unlike long positions, short positions which move against you will compound your losses.

  22. thanks @DaviS for the details. I was reading reviews of IB and they are quite troubling.
    Also, I cannot find details as if you can open a CAD and USD accounts and link them both to a big bank so when you do the currency conversion you can withdraw the US funds, e.g. you EFT from big bank CAD into the IN CAD, do the exchange to USD, then ETF out of the IB USD into a big bank USD account. It appears to me that the exchange is allowed for the purpose of using them to trad US stocks..

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  24. @AR – At IB, you don’t open separate accounts for each currency. It’s not like a bank. You just open one multi-currency account. The account is not “linked” to any bank. Funds in any major currency can be deposited into an IB account by sending the funds to IB’s bank account for that particular currency. Funds in any major currency can be withdrawn from an IB account by making a transfer in a particular currency to a bank account in the same currency (and in the name of the IB account holder). In my IB account I have cash balances in 7 currencies and I have sent and received funds in most of those currencies, for various purposes.

    Where did you see the troubling reviews? IB’s customer service is a common complaint. There are many reviews at http://www.elitetrader.com.

  25. @DavidS – selling short, then buying long shouldn’t incur any interest rate unless you’re unable to fill your long positions and journal it over before settlement date. generally, this should *never* be a problem if you pick a high volume stock.

  26. @LW – I see. I am amazed that foreign exchange costs are so high as to make this procedure worthwhile. Commissions and other charges are also high at such Canadian brokers. Why not just switch to a broker with reasonable fees? I use IB but there are others. I have not used a Canadian broker since about 1990 when I closed my account at Marathon Brown, one of the first Canadian discount brokers. At that time I remember the foreign exchange costs were very high. Not much has changed!

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  28. This is a great strategy. I’ll have to try a variation the next time I convert US$to C$. The method becomes more useful with more RSPs allowing US$ balances.

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  30. I was told by the trading desk at TD Waterhouse that they could only journal over an inter-listed security after settlement occurred (3 days). For the described technique to be effective the journaling needs to happen right away. What I am missing here? @CC what were your instructions to TDW?

  31. I am attempting my first trial conversion of 250 USD to CAD. This is also my first short ever. My short of 4 shares of RIM kept getting rejected, and TD Waterhouse eventually phoned to explain that I can’t short odd lots on the TSX. Oops! If I’m going to use RIM[M], I guess I have to convert in increments of $4500 or so. Time to search for a cheaper interlisted stock…any recommendations?

    Is there a similar odd-lot restriction for shorting US stocks?

    Just thought I would mention this wrinkle for anyone else planning USD->CAD conversion.

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  33. Did it on RBC. No issues at all. Worked like a charm. Bought first in CDN and then sold in US after. Journal was automatic, I did not have to call anyone. Did not require a short account either because I am not shorting as I already owned the stock.