ADRs vs. local share price

Can anyone explain how the pricing works between local shares and ADRs? For example, this morning Gazprom local shares are down more than 2% and Lukoil is down 0.2%, while the ADRs are up around 6% each. Plus the ADRs trade when the local market is down for a holiday (or shut down because of too much volatility—a new Russian tradition). With all the recent volatility, it often appears that the prices are completely out of line with each other. Over the last month, Gazprom is down ca. 9% and Lukoil is up ca. 1% on local markets, while the ADRs are down ca. 6.6% and ca. 4%, respectively. Since the ADRs are priced in a different currency, I assume that currency effects could nearly explain this difference, although that would mean that the ruble has appreciated in the last month. I don’t have the data at my fingertips, but I find that a little hard to believe given the heavy capital flight there recently. If the pricing is coordinated, then do the ADRs lead the pricing of the local market? They seem to have wild swings long after the Russian market closes, so then does the Russian market open immediately taking the changes in the ADR into consideration?

Pricing is independently set by local supply and demand. There is nothing to stop arbitrageurs playing though.

Do I understand you right that by “local” you mean that each share class has separate local demand, i.e. European/American vs. Russian, meaning that the prices can differ significantly depending on what each market is willing to pay?


I guess I had always assumed that they were nearly perfectly correlated, but it sure doesn’t seem that way recently. Does that mean, for example, that if the government decided to buy company shares for its pension program and bought shares on the local market that the ADR price wouldn’t necessarily move up as well? We just have to have faith that the differences will get arbitraged away over time?

They should be identical, except for currency fluctuations, so I don’t know what you are seeing. Are you also sure it is not due to different market timings? I’m interested to know.

The bid/offer in any market is decided by local supply and demand. However as I mentioned in my first post, there is nothing to stop arbitrageurs being part of that supply and demand, so ADRs will tend to track the underlying. The mechanism is supply and demand, but the effect is to track the underlying price.

I would guess it’s hard to arbitrage ADR vs local shares. Chinese ADRs are notoriously cheaper than their local peers due to supply demand. However, you can’t buy ADRs in NYSE and sell them in Shanghai stock exchange. That said, if you are a value investor, it make sense to buy wherever it’s cheaper.

What I’m seeing is very simply this: The RTS has ended trading for the day. Gazprom finished down 3.07% and Lukoil is down 0.51%. ADRs in Frankfurt are up 4.49% and 5.17%, respectively (and rising). And this is not atypical of what I have been seeing for awhile. That is a pretty impressive difference!

Well if it is in Frankfurt it isn’t an ADR! (American Depository Receipt). It’s either an EDR (European …) or a GDR (Global…)

I thought the German Democratic Republic doesn’t exist anymore.

Wasn’t that the DDR?

It is an ADR and it trades in Frankfurt. So then no one can answer the question of why an ADR’s price would rise on days when the local market is shut?

> So then no one can answer the question of why an ADR’s price would rise on days when the local market is shut? Now that’s a different question. If the local market is closed, but the security is being traded somewhere else, its price could rise or drop or whatever a stock usually does. This has nothing to do with it being an ADR. It’s like why a stock rising or falling after hours! …because there are buyers and sellers?

Exactly. It could be trading based on news or liquidity needs that didn’t happen when the parallel stock market was open. Also, currency markets trade pretty much 24/7 so some changes will be explained by currency moves.