Bufetico
B.Z. Tien bought the same company twice one day in May, once in Taipei and once in New York, and paid two different prices.
The company is TSMC, the Taiwanese chipmaker, and he’s worked there since 1998. He’s spent those years in production management at its chip plants, and today he runs operations at one of them, Fab 12B. In February the company made him a vice president.
Every month, he gets more TSMC stock straight out of his pay. A company plan takes part of each paycheck and buys shares in Taipei, and TSMC covers 15 percent of the price.
Since March, a new US law has made TSMC’s officers report purchases like these to the SEC, on the same forms American executives file. Tien’s buying now shows up there, and his forms translate every Taipei price into dollars.
On May 19, apart from the plan, his forms show him buying shares in Taipei and certificates in New York. In Taipei he bought two lots, and the pricier one cost NT$2,215 a share, which the form puts at $69.98. In New York he paid $391.81 for each certificate, called an American depositary share, and each one stands for five Taipei shares that a bank holds. Five Taipei shares at $69.98 come to $349.90. So the same five shares cost him $41.91 more in New York.
What an exchange is
An exchange is a market with its own hours, its own money and its own rulebook. You send an order while it’s open, and the price you see is the last one a buyer and a seller agreed on. TSMC trades on two of them, as 2330 in Taipei and as TSM in New York, so it gets two prices.
The ratio comes first
Toyota works the same way. It trades in Tokyo as 7203 and in New York as TM, and its annual report to the SEC says on the cover that each New York certificate stands for ten Tokyo shares. Once both prices are in dollars, a Toyota certificate should cost roughly ten times a Tokyo share.
The ratio can change, though. In Toyota’s filing for 2021, each certificate stood for two shares. Later that year Toyota split every share into five, and the next filing says ten. Divide by two today and your Tokyo price comes out five times too high. That gap comes from your own arithmetic.
Four reasons the prices still won’t match
Even after lining them up by five, Tien’s two prices didn’t match, and there are four reasons you can check.
Currency is the easy one. His Taipei shares were priced in New Taiwan dollars, and TSMC’s own filing says moves in that exchange rate can affect the price of its certificates.
The clock is less obvious. Taipei closes at 1:30 in the afternoon, which for most of the year is 1:30 in the morning in New York. New York’s main session runs from 9:30 to 4:00. The main sessions never overlap, so a Taipei price and a New York price with the same date, like the two on Tien’s forms, can be set hours apart, and each can react to news the other hasn’t seen yet.
The certificates carry fees. The bank charges up to $0.05 per TSMC certificate to create one and the same to cancel one. Pretty small next to a gap of $41.91 a certificate, but it’s a toll on anyone turning shares into certificates or back.
Money crossing borders has its own rules. When a certificate costs more than the shares behind it, as Tien’s did, a trader can hand home shares to the bank for new certificates and offer those in New York, which pulls the two prices together. In Taiwan that door is narrow. TSMC’s filing says new certificates can’t be created that way without specific approval from the regulator, except in limited cases, and the one exception for shares bought in Taipei only lets new certificates in as old ones are canceled. And every currency trade there goes through banks the regulator and the central bank pick.
His forms from July show New York higher again. The way I read it, of the four reasons only the narrow door can hold a gap open in one direction for months. The fees are too small, and the clock and the exchange rate swing both ways. TSMC’s filing describes the door and stops there.
What I found in my own data
The footnote on Tien’s forms says each certificate is five shares. The database behind my screener has no column for that number, and I was worried my model compared the price of one certificate with its own value for a single home share. For Toyota, that would be ten times off.
At the end of August I checked about 190 pairs, each New York certificate next to the same company at home. For each pair, the ratio between the two prices should roughly match the ratio between the two share counts. They never match exactly, but they come close enough to catch a bad count. For the vast majority, the share counts already came adjusted to the certificate, and the model got it right.
About 20 symbols were left over where the count was wrong, and wrong in the direction that flattered the company: the model saw more of the business behind each certificate than there really was. None of them made it onto a list when I checked, because each one failed another test first, like debt or ROIC, the profit a business earns on the money tied up in it.
Where this breaks
I left those 20 unfixed on purpose. Fixing them needs a source of ratios I don’t have. A ratio typed in by hand from the filings can go stale without warning when a company splits, the way Toyota’s two became ten. With none of them on a list, the benefit was zero. But they stayed hidden only at the default settings. Loosen the debt or ROIC sliders and some could show up with a value per certificate that’s too high.
The check has holes too. Matching by company name dragged in preferred shares, which usually pay a fixed dividend, and warrants, rights to get shares later at a set price. Both showed up as errors, and neither one was. When the home listing had its own count wrong, the comparison was dirty from the start, and a company with no listing at home can’t be checked this way at all. And the whole check is a snapshot from late August that I haven’t rerun. Tien’s forms have a hole of their own: they don’t say why he bought on both sides, or at what hour.
The hours between Tien’s two prices
Tien’s two prices carry the same date. Taipei closes before any US exchange opens, though a few smaller venues already trade some US stocks overnight. Of the four reasons, the clock is the only one with a change on the calendar. Nasdaq has set Sunday, December 6, as the start of a night session, from 9 p.m. to 4 a.m. New York time, as long as the system that gathers every exchange’s prices is ready to run at night by then. Every stock listed on a US exchange will be eligible, TSMC’s certificate included. That first night falls on Monday morning in Taipei, with three and a half hours of trading left.
Nasdaq’s notice is about trading hours. If a certificate like Tien’s still costs more than five Taipei shares with both exchanges open at once, the door is what’s left.