Have you ever signed up for a brokerage account or downloaded a stock screener, only to be forced to sign a contract about market data from a stock exchange?
Very confusing, I know. After all, if you’re signing up for a Charles Schwab account, why are you signing contracts with the New York Stock Exchange or Nasdaq?
The basic answer is that exchanges own the data they generate.
While Apple (AAPL) stock trades many times a second, it all happens on the stock exchange. It outputs price data directly from the exchange and costs them money to deliver it to you. Stock price data is a product similar to a vacuum cleaner or an Xbox.
So exchanges only lease data to vendors like stockbrokers and software providers.
From there, the vendor will either have to pass the cost on to you or subsidize your data charges in hopes of more business from you later.
What is a Market Data Agreement?
Stock exchanges use market data contracts mostly for selfish reasons. While most contracts are dedicated to ensuring you don’t misuse their data, their primary motivation is how much they can charge you.
Exchanges have two pricing tiers: commercial and non-commercial. As you can probably guess, traders designated as “professionals” are charged much higher rates for the same data than non-professionals.
The questions these contracts ask you are designed to put you into the “professional” or “non-professional” bucket, and therefore, your pricing level.
The remaining agreements are more focused on compliance-related issues.
What questions do market data contracts ask you?
These data agreements ask you a series of questions to assess whether you are using the data for anything other than personal use. Any use of market data that does not fall under strict personal use.
Do you use the data for commercial/business use?
The purpose of these questions is:
- Do you receive financial information (including news or price data regarding securities, commodities and other financial instruments) for your business or any other business entity?
- Are you trading any securities, commodities or forex for the benefit of a corporation, partnership, professional trust, professional investment club or other entity?
- Have you entered into any agreement to (a) share the profits of your trading activities or (b) receive compensation for your trading activities?
- Are you receiving office space, equipment or other benefits in exchange for your trading or acting as a financial advisor to any person, firm or business entity?
Are you working in a capacity as a financial professional?
- Are you currently working in any capacity as an investment advisor or broker dealer?
- Are you engaged as an asset manager for securities, commodities or forex?
- Are you currently using this financial information in a business capacity or to manage your employer’s or company’s assets?
- Are you using capital from another person or entity in operating your business?
Do you distribute or publish data?
- Do you distribute, redistribute, publish, make available or otherwise provide any financial information from the Service to any third party in any way?
Do you register with Financial Regulatory Agency/Board?
- Are you currently registered or qualified as a professional securities trader with any securities agency, or as an investment adviser with any commodity or futures contract market or with any national or state exchange, regulatory authority, professional association or recognized professional body?
As you can see, these four topics focus on assessing your professional standing.
In other words, if data is a core part of your business, whether as an asset manager, software professionals using it, or as a proprietary trader, you are a professional and will pay professional rates.
Professional Vs. Non-Professional: Market Data Designation
In the context of exchange market data contracts, the term “commercial” has a completely different meaning than our commonsense definition of “being paid to do something.”
Exchanges such as the NYSE define ‘professional’ when it comes to the use of market data rather than those who use market data for strictly personal use. In this case the personal use is essentially only a self-directed trade or investment solely for your benefit, and not the corporation.
In many cases, your use-case will be non-professional and personal in nature, but you will be considered a professional because of your job title or the license you hold.
Taken from Interactive Brokers Help Documents Here is a list of possible situations where you can be considered a professional:
- If the account is not in the name of a natural person
- If the account is an ORG account
- If the user is registered/qualified with any national or state exchange, regulatory authority, professional association or recognized professional body.
- If the User is engaged in a financial services business or is employed as a financial/investment adviser as that term is defined in Section 202(a)(11) of the Investment Advisers Act of 1940
- If the user is employed by a bank or other entity exempt from registration under federal or state securities laws to perform functions that require registration or qualification if such functions are performed for an entity that is not exempt.
- If the user acts as a bank, financial services provider or broker/dealer
- If the user uses the data for business purposes
- If the user is acting on behalf of an organization engaged in brokerage, banking, investment or financial activities
- If the user charges a client fee.
- If the user or account is an investment club that receives or does not receive compensation
- If the user is a subcontractor or independent contractor
- If the user uses the data in any way for the benefit of third parties
- If the user contracts, receives or uses the information for the purpose of private use on behalf of any other person or any corporation, partnership, limited liability company, trust, association or other form of entity;
- If the User contracts for, receives or uses information for the purpose of private use in any paid service by another person or any corporation, partnership, limited liability company, trust, association or other form of entity.
- If the user is/is using the information in the course of employment or in connection with any kind of trade or business
- If the account is a trust and the trustee is not a natural person. A trustee must be a natural person and cannot be an ORG with a sole proprietor who is a natural person.
- If the account is a trust that has beneficiaries who are not immediate family members or if the beneficiaries are not natural persons
- If the account is a trust that is not a family or family trust.
As you can tell, these definitions deal with a lot of legalese and technicalities that can be difficult to understand. For more information we recommend checking the source documentation directly from the exchange:
Professional vs Non-Professional Data Costs
The difference in price that professionals and non-professionals pay is significant. Professionals routinely pay many multiples of the average non-professional’s monthly rate for the same data.
For example, access to NASDAQ TotalView as well as Level 1 and 2 quotes will cost a non-professional $17/month, while the same package costs a professional $153/month.
It becomes more difficult for futures traders, as there are many exchanges with individual data packages. Getting market depth-level data (equivalent to Level 2 in the stock market) for CME, CBOT, NYMEX and COMEX will cost a non-professional just $15/month while the same data will cost a professional $420/month.
Bottom line
While many people find the practice of charging two different prices for the same product a bit unfair, it is the rules set by the exchanges that govern the data.
Moving on to things as an independent retailer (which in most cases would be designated as a non-commercial) goes this way, as their data costs are routinely non-existent or negligible.
Undercapitalized professionals, on the other hand, should take care to evaluate and trim their data usage. Consider how much you use premium packages like level 2 data, index-level data, futures data, etc. Often, your primary data package contains tools that are almost identical.
For example, instead of paying for real-time index data to access tickers like $SPX, you can simply use the corresponding ETF, $SPY, which has a nearly 1:1 correlation.
