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Understanding the mechanics of American Depositary Receipts and market making
American Depositary Receipts are negotiable certificates representing shares of foreign companies
A depositary bank (such as BNY Mellon, Citibank, or JPMorgan) purchases shares of a foreign company on a foreign exchange, then holds those shares in custody. It then issues receipts (ADRs) in the US denominated in USD, allowing American investors to buy and trade foreign equities without dealing with foreign exchanges, currencies, or settlement systems.
Each ADR can represent a fractional share, a single share, or multiple shares of the underlying foreign stock. For example, 1 TSM ADR = 5 TSMC shares on the Taiwan Stock Exchange. This ratio is set to keep the ADR price in a typical US stock price range ($20-$100).
Sponsored ADRs are created with the cooperation of the foreign company. The company signs a deposit agreement with a depositary bank and typically bears the costs. Unsponsored ADRs are created by a depositary bank without the company's involvement, often by multiple banks for the same company.
Simplest form. Trades on OTC markets. No SEC registration required. Foreign company may not be directly involved.
Listed on NYSE, NASDAQ, or AMEX. Requires SEC registration (Form 20-F). Subject to US GAAP or IFRS reconciliation.
Allows foreign company to raise capital in US via public offering. Full SEC registration and prospectus required.
Restricted to Qualified Institutional Buyers (QIBs). Not publicly traded. Used for private capital raises.
How ADRs are created, traded, and delivered to investors -- with market makers providing essential liquidity
Origin market where underlying shares trade
Holds foreign shares in custody, issues ADRs
New ADRs minted via depositary agreement
Provides liquidity & tight spreads (e.g., StoneX)
Institutional & retail access to foreign equities
Role of Market Makers: Firms like StoneX act as intermediaries, continuously quoting bid and ask prices for ADRs. They facilitate the creation and cancellation of ADRs, manage cross-border inventory, handle FX hedging, and ensure tight spreads for investors. As the #1 ranked ADR market maker globally, StoneX processes billions in ADR trades daily, connecting foreign markets to US investors seamlessly.
Spread in basis points (bps) -- lower is better for investors
Level I ADRs on OTC markets have wider spreads (45 bps avg) due to lower liquidity. Exchange-listed Level II/III ADRs benefit from tighter spreads through active market making.
Volume distribution between exchanges and OTC markets
Exchange-listed ADRs (Level II/III) account for 62% of total volume, driven by higher institutional participation and tighter spreads on major exchanges.