Imagine your account is in sterling and you own US stock that is listed on a US exchange in USD, say MCD. You want to sell your holding in MCD and immediately replace it with a different US listed stock, say KO. The way I understand it, freetrade sells your MCD shares on NYSE, charges a conversion fee for the conversion of the USD received from the sale to GBP, converts those GBP funds back to USD, and buys KO on NYSE. Result: 2 x forex change fees of .45%, amounting to a total fee of .9%.
However, since the settlement period is T+3, the conversions are virtual and never really happen. Does free trade nevertheless charge those fees?
North American brokers offer customers to “wash trades” to avoid these fees. You basically call the broker after making both trades, tell them to wash the trade, and no forex fees arise.
Do you offer this service too? You could make it dependent on volume, say you only wash trades over £1,000 or so…
To answer your question, no, Freetrade does not support wash trades (at least currently). If what you are suggesting is theoretically possible in the UK, then it is a great idea which would hugely help with saving on FX conversions
Very interesting and makes total sense. With my limited knowledge I dont see why that should not be achieveable for freetrade. Perhaps with a minimum threshold as you suggest.
This is interesting, and I wonder if we can have effectively multicurrency basic account. Still only allow to deposit & withdraw GBP, but allow holding settled/unsettled balances in other currencies.
However, I am not sure if wash trades would be allowed in the ISA accounts. As ISA account require to hold GBP balances only.
Like you, I think washing trades could make the platform very interesting to a lot of potential customers… (certainly to me).
@ Dimitri: Canada has a so-called TFSA, which is exactly like an ISA. In a TFSA you can only hold CAD balances, but the brokers nevertheless wash your trades. It makes sense, because you are never really holding USDs in the account (because settlement is T+3). The same is true of Canadian RRSPs, which are like UK SIPPs (or 401(k) in the US). They are also restricted to holding CAD balances, but brokers wash trades all the time. So I’m not sure that there necessarily are regulatory obstacles to implementing this…
