Why A Foreign Company Would Want To Cross-Trade In The US

This article is from Benzinga’s Partner Content team

For many foreign companies that are publicly traded (or one day would like to be), cross-trading in the U.S. is a critical component of accessing U.S. investors. And it should come as no surprise as to why.

The U.S. is by far the largest market in the world. In terms of market cap and number of high-net-worth investors, the U.S. markets are nearly greater than the rest of the globe combined.

Source: World Bank Development Indicators

Source: Credit Suisse

For a public company, getting exposure to U.S. investors—i.e. allowing their shares to be traded by U.S.-based broker-dealers and settle in U.S. dollars—broadens their investor base and increases visibility. It enables investors to buy and sell shares through their brokerage during normal market hours, and also opens the door for U.S. funds that are precluded from investing directly in international markets.

There are a few methods a company can go about cross-trading. For larger companies, a secondary IPO on a foreign exchange is an option. This is the route Saudi Aramco—Saudi Arabia’s state-owned oil & gas company—is taking as they search for a global exchange to list their secondary offering.

However, a secondary offering is not the only option, and, in some cases, is not the optimal approach. Amendments to the Securities Exchange Act and subsequent off-exchange deregulation have given foreign issuers with a listing on a home market exchange a more cost-effective option for accessing institutional and private investors in the U.S. through cross trading on the OTCQX Best Market.

Many large global issuers, including easyJet plc EJTTF, J Sainsbury plc JSAIY, Danone DANOY, BNP Paribas BNPQY, Roche Holding Ltd. (OTCQX RHHBY), Heineken HEINY and BASF BASFY have chosen to trade their ADR and ordinary shares on OTCQX because it increases their visibility in the U.S. public market with a fair valuation. The company’s shareholders also benefit because the reporting requirements to trade on OTCQX alleviate the burdensome, costly and duplicative requirements of a U.S. national exchange.

In 2018, nearly 89% of trading volume on OTC Markets came from foreign primary-listed issuers cross-trading in the U.S, and a 2018 study by Oxford Metrica found that U.S. ownership of shares in foreign companies increased from an average 1.05% one year prior to joining OTC Markets to 7.76% after one year as a direct result of the cross-trading.

Enhancing Liquidity

Cross-trading in the U.S. also generally correlates to increased liquidity and shares, both in the company’s home market and abroad.

According to the Oxford Metrica study, on average, international companies experience a 37% increase in trading volume when cross-trading on OTC Markets, and a 28% increase in liquidity on their home market.

In particular, firms listed on Canadian exchanges exhibit a 35% increase in average daily volume within their home market after joining the OTCQX Market, while companies listed in Asia exhibit a 30% rise and European firms see a 12% increase.

This is true for larger corporations—such as Roche and adidas ADDYY—but especially so for smaller firms because of their smaller average daily trading volumes. According to the Oxford Metrica study, smaller companies generally exhibit a greater trading volume increase (43%) than larger companies (12%).

The study also found that international companies rise by an average of 1.5% in their home markets in the 180 days after joining OTCQX, speaking to the premium investors attribute to U.S. market exposure.

For global companies, the benefits of trading in the U.S. are clear. It’s simply a question of how.

OTC Markets is a content partner of Benzinga

Photo by Christine Roy on Unsplash