Wednesday, October 20, 2010

Using RBC Direct Investing for Norbert's Gambit (Part 2)

In my last post I discussed how I wanted to use Norbert's Gambit to convert USD to CAD. In this post I'll show the results of both a USD to CAD, and a CAD to USD conversion, using online trade RBC Direct Investing. I discuss the implications of the trading cost in my conclusion.

Attempt 1: USD to CAD

I was understandably nervous with this being my first attempt. Worst case I might end up with a shares in Royal Bank that I didn't want and some kind of invalid transaction fee for trying to sell shares I didn't own.

Step 1:Purchased NYSE:RY shares @ 55.26 USD
Step 2:Sold equal number of TSX:RY shares immediately @ 55.48 CAD

The exchange rate at this point was 1 USD = 1.00353 CAD, so my break even price for selling would have been $55.455, I sold at a profit of around 0.045%. This is a lot better than paying 0.965% for my bank to convert.

One gotcha I wasn't anticipating was the time for the transaction to clear. Immediately after the trade I showed as owning a positive number of shares in my USD account, and a negative number in my CAD account - this was my worst nightmare! After a little research I found another another RBC user who claimed that if I waited a couple days this would sort itself and it did. 48 hours later I showed as owning 0 shares of RY in either account, and my cash had cleared.

Attempt 2: CAD to USD

I attempts this trade a few days later after my first attempt had fully cleared.

Step 1:Purchased TSX:RY shares @ 55.91 CAD
Step 2:Sold equal number of NYSE:RY @ 55.06 USD

The exchange rate at this point was 1 USD = 1.01505 CAD, so my break even price would have been $55.081/share. I sold at 2.1 cents under that, or a penalty of 0.038%. Still much better than the 0.965% my bank would have charged.

What about Trading Costs?

I got lucky, averaging a 0.007% profit on my trasactions. Canadian Capitalist says on average you'll pay 63 basis points (0.63%) which is 0.345% less than my bank charges. If you're lucky you'll pay less, but you might pay more.

It also costs two trades (for me $20) to execute Norbert's Gambit, so how much money do you have to convert to make it worthwhile?

Assuming 63 basis points and the 0.965% comparable conversion fee from a bank, you will break even on average on a transaction of $5800. For every $1000 you convert over the break even point on average you will save $3.45, or about the cost of a latte.

Should you do Norbert's gambit?
  • Do you need to convert $5,000+?
  • Does your broker charge you $10 or less for trades?
  • Does your broker support selling interlisted stocks?
  • Do you like lattes?
If you answer yes to all of the above you may want to try Norbert's Gambit!

13 comments:

Daniel Goertzen said...

Hi, did your sell go through as a short sell or a "regular" sell?

Christina Norman said...

It went through as a regular sell.

Canadian said...

Thanks for the mention Christina. I posted this reply on my blog:

I was told that TD Waterhouse will charge a higher fee for placing the second transaction with an investment representative. These broker assisted transactions are more expensive.

When I actually performed the Norbert Gambit, I was only charged two Webbroker commissions of $9.99 each. Also, I used RIM because it is more liquid than Royal Bank. Potash (POT) was another suggestion I received for a liquid stock.

If each conversion costs a total of $20, the break even point is much less: just $2,000. After that, the savings are $10 for every $1,000 converted. That could be a lot of lattes!

Nestor said...

Hi, wondering if this could be done instead of a wire transfer?

I have savings in an U.S. bank, but I moved to Canada and I would need to transfer money next year to buy a house.

I understand the gambit itself, however can't figure out how to make money flow between US bank -> US? CAN? broker -> CAN bank

So should I open an account with a discount broker in the US? or in Canada?

Thanks
NH

Christina Norman said...

Hey Nestor.

You can probably save money doing this. You need to open an investing account with a broker that has both US$ and CAD$ accounts. I suggest you google: Norbert's Gambit how to

mre said...

Nice post Christina. I'm thinking of giving this a try. Did you have to contact RBC at any point or did you simply do every as you've described through the online portal? Also, is it possible to transfer the US funds out of the brokerage account into a US$ bank account?

Laddo said...

There is an online "Norbert's Gambit Calculator" supplying a live list of 10 interlisted stock:
http://www.northernraven.ca/financial/NGcalculator.php

It helps selecting the most profitable stock to use in the trade at any given moment.

sclim said...

@Laddo: were you being facetious with your comment? If not, what did you mean by "the most profitable stock to use in the trade at any given moment" ? On the face of it, it would appear to be the stock that, in the hopefully brief instant of exposure between executing your purchase of X number of shares and executing your sale of the same X number of shares in the different currency, the value per share goes up somehow, instead of your original aim of not drifting too far from the purchased value. How would you arrange for that to happen? I understood that this was basically the holy grail that every star struck hopeful investor dreams of but is basically a random risk that you have no control over.

sclim said...
This comment has been removed by the author.
J in NS said...

Could you please detail the math - I'm not able to compute breakeven sale price as you gave it....

The exchange rate at this point was 1 USD = 1.01505 CAD, so my break even price would have been $55.081/share. I sold at 2.1 cents under that, or a penalty of 0.038%. Still much better than the 0.965% my bank would have charged.

What about Trading Costs?

I got lucky, averaging a 0.007% profit on my trasactions. Canadian Capitalist says on average you'll pay 63 basis points (0.63%) which is 0.345% less than my bank charges. If you're lucky you'll pay less, but you might pay more.

..... Thanks

J in NS said...

Could you please detail the math - I'm not able to compute breakeven sale price as you gave it....

The exchange rate at this point was 1 USD = 1.01505 CAD, so my break even price would have been $55.081/share. I sold at 2.1 cents under that, or a penalty of 0.038%. Still much better than the 0.965% my bank would have charged.

What about Trading Costs?

I got lucky, averaging a 0.007% profit on my trasactions. Canadian Capitalist says on average you'll pay 63 basis points (0.63%) which is 0.345% less than my bank charges. If you're lucky you'll pay less, but you might pay more.

..... Thanks

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