EDUCATION CENTER
GTT RESOURCES: NASDAQ DATA FEED FEES

Robert A. Green, CPA, wrote the below article for the October 2003 issue of Active Trader magazine. When it comes to datafeed fees, "non-professionals" pay less, while licensed brokers, registered professionals and entities must pay more expensive "professional" rates. Traders can avoid the higher fees by understanding the rules and learning to navigate the nuances of this area of the business.

We have been working with NASDAQ to clarify their definition for "non-professional" rates. Our goal is to change the current definition so that traders who trade solely for their own accounts but use an entity (for retirement plans and health-insurance deductions) may still qualify for non-professional rates. Currently, without exception, all entities should pay the "professional" rates. If you have any questions about this topic we suggest you consult with us.

Here is the original article submitted, before editing by the magazine.

If you are deemed a “professional” by Nasdaq and want their real-time market information, as most traders do, you will be charged between $50 and $170 per month after execution of a subscription agreement. Nasdaq offers significantly lower fees (almost five or more times less) to “non-professionals,” but qualifying for these lower fees is a challenge for some traders.

In general, if you trade for your own individual account, are not registered as a security professional and use the Nasdaq market information for your own “personal” use, you qualify for the lower non-professional rates.

By default, everyone is a “professional” unless you can document you meet the facts and circumstances Nasdaq tests to qualify for non-professional status.

The first test is whether or not you are a registered securities professional. If you are exempt from registration but still a security professional such as an exempt Investment Advisor, you still fail this first test.

If you pass the first test (and are not a security professional), the second test is whether you are a natural person or your trading account is opened in the name of an entity. Only natural persons (individual trading accounts) pass this test.

Finally, the last “catch-all” test is whether or not you are using the Nasdaq market information for your own personal use or for the benefit of others. If you are managing money for investors or friends (family members are exempt here), or operating a Web site or “financial newsletter” for pay or not, you are using this market information for third parties and not just for your personal use. In that case, you fail the third and final test.

The Nasdaq rules are a little confusing, but the spirit is very clear.

It it wise for all traders and money managers to read the detailed rules (Nasdaq Vendor Alert #2001-33 - Aug. 31, 2001 - REVISED Nasdaq Definition of Non-Professional Usage) published on the Nasdaq site at www.nasdaqtrader.com/trader/news/2001/vendoralerts/valert2001-33.stm.

Click here for details of the Nasdaq's current monthly fees.

I excerpt the Nasdaq rules below. Notice the rules are somewhat complex and possibly confusing for some lay persons. I myself had to call Nasdaq and speak with the persons in charge to get a better understanding of the rules, recapped up top in this article. The Nasdaq person mentioned they may publish another revision to include the three-part test summarized above.

You don’t have to figure it all out yourself. I have done this for you and give you a good heads up in this article.

The spirit of the rules is very clear. You can be a hyperactive trader and qualify for “business tax treatment” with the IRS, and still qualify for the lower “non-professional” Nasdaq rates, if you are not a security professional, trade as an individual and do not share your market information for the benefit of others. Most traders fall into this window of non-qualification.

Business traders who want an entity for further tax savings may trigger the higher professional rates.

Most business traders reap the majority of trader tax status benefits as “sole proprietors;” these traders are otherwise known as “unincorporated” taxpayers. They open brokerage accounts in their individual names, thereby passing Nasdaq test two – being a natural person rather than an entity.

Sole proprietor business traders miss out on two key additional tax benefits – the opportunity to deduct health-insurance premiums and retirement plan contributions. Many sole proprietor business traders form simple entities such as husband-wife general partnerships, multi-member LLCs or S-Corporations to cash in on these other tax benefits. (See "Simpler is better," Active Trader, November 2002).

Forming an entity for additional tax savings is wise, but its important to figure out beforehand if you will be forced into the higher professional data feed rates and how much that additional cost will be. Keep in mind that many brokers cover the cost for non-professional data feed fees, so the entire amount of the professional fees may be additional costs to your trading business. If you are using a lower tier of Nasdaq services, this additional cost may be small vs. the tax savings you will generate with a business entity tax strategy.

It is important to note there are a few possible ways to form an entity and still qualify for the non-professional rates.

Have your cake and eat it too!

You can form a “defacto” husband-wife general partnership, which is sufficient to drive all maximum possible entity tax savings strategies (see "I promise to love, honor and save your tax money," Active Trader, July 2003).

This type of partnership means the brokerage accounts can be left in the individual names of the husband and wife. In that case, when your broker executes the Nasdaq data feed agreement, the agreement is in the name of natural persons. To avoid further confusion, it’s best to sign that agreement with the name of one spouse only to prevent the case of possibly owing two sets of fees (for each spouse). A Nasdaq person mentioned this should be fine.

Ask your broker for help.
Brokers vary in their interpretations of these Nasdaq rules, so ask them how they will handle your entity before you form it. You want to know all costs ahead of time before pursing an entity-based tax savings strategy.

Some brokers may allow you to open an entity account and still not charge you for the professional rates. Perhaps they will eat the additional cost themselves or finesse the Nasdaq subscription agreement to claim you still are a non-professional.

Caution: It is important for you to understand what position your broker is taking on your behalf and to fully understand the questions and forms your broker asks you to answer and fill out.  Nasdaq will hold you responsible for your claimed non-professional status. Your broker will rely on your representations on the subject. Nasdaq will only hold your broker partially responsible if your broker purposely attempts to skirt their responsibilities in this regard (explained in the detailed rules). For example, if your broker knows you don’t qualify for non-professional status and tells you to just sign the forms without explaining them, then you can seek some indemnity from your broker, but again you are at risk and the responsible party.

LLCs and S-Corps have a difficult time getting non-professional status

A husband-wife general partnership can navigate around the Nasdaq rules and keep non-professional status. However, other trader business entities such as LLCs and S-Corps will be considered professionals by default.

Again, speak to your broker. Perhaps they can take a position that you and your family own 100 percent of your LLC or S-Corp. and as a sole proprietor you qualified as a non-professional. In spirit, you should otherwise still qualify except for the LLC technicality. Perhaps they can find a way for the Nasdaq agreement to be executed in your individual name. This may or may not pass muster with the Nasdaq. In theory, it seems fair and not abusive to the spirit of the rules.

The IRS says it’s “business” and Nasdaq says it’s “personal”

As is par for the course when it comes to rule-making bodies, their universe comes first and the customer must fend for themselves in reconciling different rules for their own universe. Whether it’s GAAP vs. tax when it comes to understanding financials, or the IRS vs. Nasdaq or the SEC or CFTC, you need to read all the rules and then figure out the apples vs. oranges.

As mentioned above, you can be a hyperactive business trader for your own account and this can be deemed “personal” by Nasdaq. If you pass the other two tests (not registered and a natural person), you are non-professional.

Licensed brokers sometimes try to skirt some rules and it won’t work for long.

Brokerage firms will insist that licensed brokers be charged the higher “professional” data feed fees. Licensed brokers are usually also subject to material restrictions on trading by their employer brokerage firms. Often times, licensed brokers may want to open a trading account in their spouse’s or other family member’s name. This can lead to other complications and may subject the broker/trader to compliance infractions. Consult with a CPA or attorney beforehand.

Ready for a consultation with a GTT CPA?

The Nasdaq rules

We expect an announcement about a revised definition very soon, so do not rely on the below without first checking the 2004 Nasdaq Vendor Alerts. Click here to go to the Nasdaq Web site.

Nasdaq Vendor Alert #2001-33 - August 31, 2001
REVISED Nasdaq Definition of Non-Professional Usage

Vendors of Nasdaq^® real-time market data are required to identify the non-professional status of any subscriber for whom they are seeking to pay the lower, non-professional subscription rate for Nasdaq Level 1 Service^SM or Nasdaq Quotation Dissemination Service^SM.

To qualify for the lower, non-professional rate, an individual subscriber must be able to answer "NO" to all of the following questions:

• Are you registered with any state, federal, or international securities agency or self-regulatory body?
• Are you engaged as an Investment Advisor?
• Are you employed by an organization that is exempt from U.S. securities laws that would otherwise require your registration?
• Is your Nasdaq Subscriber Agreement signed in a business or organizational name?
• Are you using or planning to use Nasdaq data for any reason other than personal use?

If the subscriber can answer "YES" to any of these questions, Nasdaq considers the subscriber to be professional and ineligible for the lower fee rate.

Under Nasdaq's Data Policies, it is the responsibility of the market data vendors to verify that a subscriber's non-professional status conforms to Nasdaq's requirements as described herein. According to the Nasdaq Subscriber Agreement and Nasdaq Vendor Agreement, the phrase "non-professional" is defined as follows:

"Non-professional" means, any natural person who is neither: (a) registered or qualified in any capacity with the SEC, the Commodities Futures Trading Commission, any state securities agency, any securities exchange or association, or any commodities or futures contract market or association; (b) engaged as an "investment advisor" as that term is defined in Section 201 (11) of the Investment Advisors Act of 1940 (whether or not registered or qualified under that Act); nor, (c) 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. The phrase "Professional Subscriber" means all other persons who do not meet the definition of Non-Professional Subscriber.

Nasdaq's definition of non-professional subscribers will permit natural persons associated with non-commercial organizations (such as family investment trusts and investment clubs) to access Nasdaq market data at non-professional rates.

Vendors are required to verify the status of any subscriber attempting to receive the non-professional subscription rates for Nasdaq Level 1 Service^SM or Nasdaq Quotation Dissemination Service^SM. Please note that the organization itself cannot be considered a non-professional subscriber, nor can any professional staff paid to support its activities (such as attorneys, accountants, administrative staff, etc.) In addition, vendors are responsible for ensuring that subscribers registered with any state, federal or international securities agencies are classified as professional.

To obtain the reduced non-professional rates for qualifying subscribers associated with non-commercial organizations, vendors are required to administer and maintain a separate Nasdaq Subscriber Agreement for each individual subscriber accessing Nasdaq data.

Notice Nasdaq states a non-commercial organization can be non-professionals, which implies that a commercial organization is professional. So just being an organization is not the key issue.

Vendors must also comply with Nasdaq's Usage Reporting Policy including submission of regular usage reports listing the total number of users or devices with ability to access Nasdaq data during the reporting period. Upon request, vendors must have the ability to provide Nasdaq with a report detailing the name of each individual subscriber included under each account and each subscriber's respective professional or non-professional status.

To obtain a copy of the Nasdaq Vendor Agreement, please refer to the Distributor Agreements section of this site. For a copy of the Nasdaq Subscriber Agreement, please refer to the Subscriber Agreement Administration Policy section of this site.

To confirm a subscriber's professional registration status, market data vendors may contact the NASD Regulation^SM Public Disclosure Hotline at (800) 289-9999. The NASD Regulation Public Disclosure Program also is available via the Internet at www.nasdr.com.

Please refer to Vendor Administration Notice #1999-6 for the former definition of non-professional.

Questions regarding this notice should be directed to Nasdaq Market Data Distribution at (301) 978-5307.