Thursday, March 8, 2012

Trying the Norbert Gambit at BMO Investorline

A while back Canadian Capitalist described a “foolproof method to convert Canadian dollars to U.S. dollars” using a version of the so-called Norbert Gambit. This involves buying the exchange-traded fund DLR with Canadian dollars, journaling it over to the U.S. dollar side of your account to make it DLR.U, and selling it to get U.S. dollars. I decided to try this at BMO Investorline. Overall it worked, but there were a few surprises along the way.

Note that each unit of DLR just holds US$10. This is true whether it is DLR or DLR.U. The difference is that DLR trades in Canadian dollars and fluctuates with the exchange rate, and DLR.U trades in U.S. dollars.

I don’t normally like to talk numbers about my personal accounts, so for the rest of this article, I’ll scale all the numbers down as though I was converting C$100,000 to U.S. dollars.

The bid-ask spread on DLR was C$9.79 to C$9.81. I placed an order to buy 10,100 units of DLR at a limit of C$9.81. This trade was filled at C$9.81 almost immediately. I then called Investorline to see whether I would have to wait until the trade settles in 3 days to complete the currency conversion. This is where things deviated from Canadian Capitalist’s recipe.

The Investorline representative told me that their online systems can’t handle selling DLR in U.S. dollars, but that he could do it for me over the phone for the online commission of $9.95. He also said that I didn’t have to wait the 3 days; he could do the trade immediately.

Curiously, the spread was US$9.95 to US$9.97. I’m not sure why this makes any sense when each unit is worth US$10, but at US$9.95, I was getting an implied conversion rate of 9.81/9.95 = 0.9859, which was quite close to the fair exchange rate at that time of 0.9852. So I had the representative place a limit order to sell my DLR.U at US$9.95, which was filled almost immediately at US$9.95.

After the transaction was complete, the representative told me that my implied currency-conversion rate was 13 basis points (0.13%) better than the “market rate,” which I took to mean that if I had called to ask Investorline to do the currency conversion without using the Norbert Gambit, I would have received a rate of 0.9872. This is only about 0.20% off the fair exchange rate.

It seems that you get a better rate when calling a representative than you get when converting currency online. I checked the Investorline online rates for converting $100,000, and the spread is 1.2%, or 0.6% lost for each conversion. This is a lot worse than the 0.2% cost that the representative could have given me. On $100,000, the difference is $400 for each conversion.

I found a minor glitch after the representative sold DLR.U for me: my account continued to show that I had DLR, but also showed that I had U.S. dollars from the sale. So my overall account balance shown was high by about $100,000. This was corrected the next day.

One thing that makes me nervous is that after a week my account continues to show a long position in DLR and a short position in DLR.U. The representative led me to believe that the sale of DLR.U would consume the DLR units and not create a new short position. This whole exercise won’t achieve the goal of reducing the cost of currency conversions if I have to pay margin interest. So far they haven’t tried to charge me any interest.

My complete list of transactions was to sell Canadian shares, buy DLR, sell DLR.U, and buy U.S. shares. I was able to do this all in one day and save on currency conversion costs. What could make it better would be allowing me to do the DLR.U sale without having to make a phone call. Even better would be to tighten the currency conversion spreads to make the Norbert Gambit unnecessary.

This whole area of currency conversion seems quite murky to me. The costs are not at all transparent. Doing transactions with large amounts of cash makes me nervous, but I’m reasonably confident that I paid significantly less than the default cost of $600 if I had gone the easier route.


  1. Also with BMOIL, I used inter-listed RY on Feb.26 - bought in CAD and sold in USD. Either the pricing arbitrage wasn't working or the market shifted in the few seconds between the buy, done first, and the sell. In the end it cost me about 1% to do the conversion that way - not too good! Then a month later I had to call in to get them to correct, which they did immediately without question or fuss, a charge for RY's dividends on the apparently (to BMO's computer systems) short USD side of the stock. Guess my error was placing market orders for the stock buy and sell.

  2. oops, meant say I did the transaction Jan.26

  3. @CanadianInvestor: The 1% loss is disappointing. Did you look at the intraday prices at the time to see if both Canadian and US shares moved together? A 1% move seems suprisingly large.

    As for the long-short issue, it seems that Investorline treats the CDN and US sides of an account as essentially separate accounts. I've frequently has to call them up to move US shares from the Canadian to US side so that dividends don't get automatically converted back to $CDN.

  4. I just did the same things at IL. I had to call them to sell as DLR.U since their website isn't capable of trading the US version yet. They mentioned that their IT team is working on adding this to their online trading. Hopefully soon.

  5. @Bret: It certainly would be nice to be able to do the entire transaction online. When you did this, were you happy with the implied currency conversion rate you got?

  6. I bought DLR at 9.83 late last week. Called them Tuesday to transfer over to US. Called them this morning to sell DLR.U with a bid/ask of 9.94/9.95. I sold with a limit of 9.94 and it filled quickly.

    I'm seeing the same thing as you with DLR still in my account as well as the US cash. IL support told me that will go away in a couple days.

  7. @Bret: I just checked my account and the DLR and DLR.U positions are gone. It took a week from the day that I made all the trades.

  8. @Michael: Thanks so much for the mention. It's interesting to read your experience with BMOIL. The huge advantage of converting CAD to USD with DLR, IMO, is to precisely avoid what Canadian Investor found out. The market moves do not matter because once you purchase DLR, you have locked in your exchange rate.

    I'm a little surprised that the BMOIL rate is only 0.6%. That's really good. In my experience, TDW typically charges 1.5% or so each way.

    I'm given to understand that with BMO and RBC, you can buy DLR and sell DLR.U the same day and their systems are set up to handle this. Unfortunately, it is not true at TDW.

  9. @CC: I agree that DLR gives an advantage, but on the other had, it's spreads are bigger than many other stocks. The 0.6% is only half the spread and it is on $100,000. The full spread is 1.2% and this may be higher on smaller amounts.

  10. Just did the buy DLR then sell DLR.U today at BMOIL and it all went smoothly (their system still doesn't handle DLR.U online so they offer the 9.95 trade commission when doing it through a rep; funny thing is that the transaction done by the rep - sale of DLR.U showed up immediately online). I asked about currency conversion from the rep or online and it was the exact same rate to the penny. Mind you, it was a relatively small amount - a few thousand $$ - not the $100k of big rollers like Michael!

  11. @Michael I just read that you are happy to get questions from beginners, well whatever comes before beginner, I'm that. I'm currently looking to do exactly what this post entails, the Norbit Gambit with BMO Investor Line. Is this still a feasible way to exchange Canadian currency at a good rate? Any knowledge or insight you could give would be more than appreciated. Thanks!

    1. @Kaycee: It worked fine for me as described in this post, but I haven't had a need to do it since. If you have any concerns, you're probably best to call Investorline before you begin to see if the process has changed. Make sure to be clear that you'd like to do it all online and if they can't do that, you want the same low commissions.

    2. Hi Michael,
      have you had any experience doing the reverse?

      also is there a reason why DLR/DLR.u is the popular choice for the Norbert Gambit?

    3. @William: I haven't tried the Norbert gambit in reverse. I think the reason for using DLR is that there is limited risk of price changes. You can get tighter spreads using stocks that list in both countries, but there is a higher risk of a price change between trades.