Why Do Brokers Make You Sign Market Data Agreements?

Have you ever signed up for a brokerage account or downloaded a stock screener, only to be forced to sign contracts about market data from a stock exchange?

Pretty 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 that their exchange produces.

When Apple (AAPL) stock trades several times a second, that all takes place on a stock exchange. The output of that price data is straight from the exchange and costs them money to stream it to you. Stock price data is a product just like a vacuum cleaner or an Xbox.

So the exchanges simply lease the data to vendors like stockbrokers and software providers.

From there, the vendor either has to pass the cost onto you or subsidize your data charges in the hopes of more business from you later.

What is a Market Data Agreement?

Stock exchanges use market data agreements for selfish reasons, mostly. While much of the contracts are dedicated to ensuring that you don’t misuse their data, their primary motivation is to assess how much they can charge you.

The exchanges have two pricing tiers: professional and non-professionals. As you could probably guess, traders designated “professionals” are charged much higher rates for the same data than non-professionals.

The questions that these contracts ask you are designed to put you into either the “professional” or “non-professional” bucket, and hence, your pricing tier.

The rest of the contracts are more focused on compliance-related issues.

What Questions Do Market Data Agreements Ask You?

These data agreements ask you a series of questions to assess if you’re using the data for anything other than personal use. Any use of market data that doesn’t fall under strictly personal use.

Are you using data for commercial/business use?

These questions aim to:

Do you receive financial information (including news or price data concerning securities, commodities and other financial instruments) for your business or any other commercial entity?
Are you conducting trading of 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 profit 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 work as a financial consultant to any person, firm or business entity?

Are you acting in capacity as a financial professional?

Are you currently acting in any capacity as an investment adviser 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 for managing your employer’s or company’s assets?
Are you using the capital of any other individual or entity in the conduct of your trading?

Do you distribute or publish the data?

Are you distributing, redistributing, publishing, making available or otherwise providing any financial information from the service to any third party in any manner?

Are you registered with a financial regulatory agency/board?

Are you currently registered or qualified as a professional securities trader with any security agency, or with any commodities or futures contract market or investment adviser with any national or state exchange, regulatory authority, professional association or recognized professional body?

As you can see, these four subjects are focused on assessing your professional status.

In other words, if the data is a core piece of your business, whether that’s as an asset manager, using it in a software professional, or as a proprietary trader, you are a professional and will pay professional rates.

Professional vs. Non-Professional: Market Data Designations

In the context of an exchange market data agreement, the term “professional” means something entirely different from our commonsense definition of “being paid to do a thing.”

Exchanges like NYSE instead define a ‘professional’ when it comes to market data usage as anyone who doesn’t use market data for strictly personal use. Personal use in this case is essentially only self-directed trading or investing solely for the benefit of you, and not a corporation.

In many cases, your use-case will be non-professional and personal in nature, but you’ll be deemed as a professional simply because of your job title or a license you hold.

Taken from Interactive Brokers’ help documents, here is a list of potential situations where you could be deemed 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 financial services business or employed as a financial/investment adviser as that term is defined in Section 202(a)(11) of the Investment Advisors Act of 1940
If the user is employed by a bank or other organization exempt from registration under federal or state securities laws to perform functions that would require registration or qualification if such functions were performed for an organization not so exempt
If the user operates as a bank, financial services provider, or broker/dealer
If the user uses data for commercial purpose
If the user is acting on behalf of an institution that engages in brokerage, banking, investment or financial activities
If the user is charging client fees.
If the user or the 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 data in any manner for benefit of third parties
If the user is in contract for, receives, or uses 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 is in contract for, receives, or uses Information for the purpose of Private Use in any Service that is paid for by another person or any corporation, partnership, limited liability company, trust, association or other form of entity
If the user is accessing/using information in course of employment or in connection with any form of trade or business
If the account is a Trust and the Trustee is not a Natural Person. The Trustee must be a Natural Person and cannot be an ORG with a sole owner that is a Natural Person.
If the account is a Trust that has beneficiaries that are not immediate family members or if the beneficiaries are not Natural Persons
If the account is a Trust that is not a familial or family Trust.

As you can tell, these definitions deal with a lot of legalese and technicalities which can be tough to understand. We recommend checking the source documents directly from the exchange for more information:

Here is the NYSE non-professional subscriber policy: https://www.nyse.com/publicdocs/nyse/data/Policy-Non-ProfessionalSubscribers_PDP.pdf
Here is a list of documents from Nasdaq explaining their data use policies: https://www.nasdaqtrader.com/Trader.aspx?id=GDP_Ops

Professional vs Non-Professional Data Costs

The price differences that professionals and non-professionals pay are significant. Professionals regularly pay many multiples of the average non-professional’s monthly rate for identical data.

For example, access to NASDAQ TotalView as well as level 1 and 2 quotes will cost a non-professional $17/month, with the same package costing the professional $153/month.

It gets tougher for futures traders, as there are several exchanges with individual data packages. Getting market depth-level data (the equivalent of level 2 in the stock market) for the CME, CBOT, NYMEX, and COMEX would cost a non-professional just $15/month whereas the same data would cost a professional $420/month.

Bottom Line

While many view the practice of charging two different prices for the same product as a bit unfair, those are the rules set by the exchanges who control the data.

Going at things as an independent retail trader (who would in the vast majority of cases be designated a non-professional) has a leg-up in this manner, as their data costs are routinely nonexistent or negligible.

Undercapitalized professionals, on the other hand, should take care to assess their use of data and cut the fat. Consider how much you utilize the premium packages like level 2 data, index-level data, futures data, and so on. Oftentimes, there are instruments within your primary data package which are nearly identical.

For example, rather than paying for real-time index data to access tickers like $SPX, you can simply use the corresponding ETF, $SPY, which has an almost 1:1 correlation.