So you really want to open a US broker account and trade on the Internet
The Globe & Mail's Rob Carrick published the following piece on how to open an account with a US discount broker. Here's Bylo's annotated version [my comments in italics] with information Mr. Carrick didn't give you.
So you want to open a U.S. broker account and trade on the Internet
Saturday, March 20, 1999
A weak dollar has just about killed the appeal of cross-border shopping, except if you do a lot of stock trading over the Internet.
The spreads between Canadian and U.S. on-line trading commissions are so big in many cases that they look good even after factoring in the onerous exchange rate.
Minimum Canadian on-line commissions are commonly in the $27 to $29 range. In the United States, it's not hard to find $9.99 (U.S.) trades, which translates into roughly $15 (Canadian). This differential is huge if you're even a sporadically active investor, and it's all the more attractive when you factor in the faster order execution at U.S. brokers.
This is an apples to oranges comparison. Canadian brokers charge ~CA$27 to trade Canadian stocks and ~US$27 to trade US stocks. Some of the newer and smaller US brokers charge less, but most of the discounters charge US$10 to US$12 for online trades. Further, since few if any US discount brokers trade on the TSE the comparison with CA$ is moot.
There's nothing to stop Canadians from opening U.S. brokerage accounts save the unwillingness of these brokers to accept the business.
Well, not quite. According to an e-mail I received from the US SEC "There is no restriction under United States law barring you from opening a brokerage account with a US broker."
But that doesn't mean the process is entirely above board. Technically, a broker is not supposed to accept clients in a province unless it's registered to do business there. A quick glance at the Ontario Securities Commission's list of registered dealers didn't turn up any of the cheap U.S. Internet brokers.
Why should a US broker file with a Canadian securities commission? US brokers are required to conform with US securities regulations. As it is, Canadian securities regulators are pretty toothless when it comes to "protecting" Canadian investors from abuse by the Canadian brokerage industry. Why would Canadians want Canadian regulators to also "protect" them from US brokers?
The OSC is just now getting around to the question of how to enforce this rule. As a first step, commission staff are researching which U.S. states have regulations preventing brokerages registered there from trading securities on behalf of foreign clients.
Canadians get rightfully indignant when the US government tries to enforce its regulations on us. Why should Canadian government agencies try to enforce their regulations on US brokers?
If Canadian provincial regulators could persuade U.S. state regulators to get tough on this matter, it might be much harder in the future to find a stateside broker who will accept your business. For now, though, there are plenty of U.S. options for Canadians.
The OSC should be half as zealous in its regulation of Canadian brokers!
An ideal place to start the search for a U.S. broker is the Directions site on the World Wide Web. It contains a listing of 68 U.S. discount brokers and notes which firms will deal with Canadians. Toll-free phone numbers and links to the Web sites of the listed brokers are also included.
Norman Rothery, who runs the Directions site, said some of the brokers who won't deal with Canadians indicated it was because they were not licenced to do business in this country.
It seems that prohibitions on dealing with Canadians aren't sacrosanct, however. Some of the brokers who are down in the Directions list as not accepting such business said they would do so when contacted late this week.
To open an account with a U.S. firm, you'll need to fill out a W-8 Internal Revenue Service form, which is a certificate of foreign status. Some U.S. firms said it's also necessary to complete a 1001 form, which pertains to withholding tax on income-producing investments. Copies of both forms can be downloaded on Suretrade Inc.'s Web site, providing you have Adobe Acrobat software.
Why go to Suretrade's site when you can go straight to the horse's mouth (since we're talking about the taxman, perhaps it should be the other end of the beast)?
The biggest challenge in opening a U.S. account has to be picking a broker. A good place to start is the March 15 issue of Barron's, which contains the financial weekly's annual ranking of on-line brokers.
If you're looking to a U.S. broker primarily to save money, be aware that Barron's ranking of 21 brokers emphasizes trade execution, reliability and range of services more than low commissions.
That explains why three of the four top-ranked brokers, DLJdirect, Discover Brokerage Direct and National Discount Brokers, all have minimum commissions no lower than $19.75 (U.S.). The fourth, Web Street Securities has an interesting proposition -- a $14.95 base commission and free on-line Nasdaq trades of 1,000 or more shares priced over $2.
The best combination of low prices and solid reliability on the Barron's list is Datek Online, which has a minimum $9.99 commission.
Definitely don't pick a U.S. broker without visiting a Web site called Online Investing Services. Twice a month, this site reviews 80 different companies according to cost and overall service. It also has a summary of rankings by business magazines, including Barron's, as well as links to the on-line broker bulletin boards of The Motley Fool and Silicon Investor.
The ratings on Online Investment Services are divided into three categories -- deep, mid- and high-cost discounters. The top five stocks among deep discounters go to Brown & Co., Datek, Trading Direct, Muriel Siebert and ForbesNet.
Online Investment Services also has a special section evaluating brokers for their service to day traders, and it looks at the best brokers for novice and more experienced investors as well.
Barron's and OIS are but two of many ratings available on the web. For a list of several more see Buying US Mutual Funds and Stocks from Canada.
The OSC points out that in using a U.S. broker a Canadian investor is giving up certain protections. U.S. firms aren't members of the Canadian Investor Protection Fund, which covers client money lost in the collapse of a broker. As well, there's no enforcement of the know-your-client rule, which requires trades to be checked against a client's investing objectives.
US brokers are required to register with the US SEC [the national securities regulator] and SIPC [the US version of CIPF]. Had Mr. Carrick done some research he might have checked with those agencies to see what protection they offer foreign [i.e. Canadian] investors.
Of course, the absence of the so-called KYC rule is one of the reasons why U.S. brokers can deliver faster, cheaper service.
Of course, the Globe & Mail, as well as other newspapers, are full of stories about Canadian brokers who apparently ignored their clients' KYC information as they made inappropriate investments and/or churned accounts.
Now here are some important issues that Mr. Carrick neglected to mention:
Rating the online brokers
Here are the addresses of the Web sites mentioned in this column:
http://www.sonic.net/donaldj (Online Investment)