| EDUCATION
CENTER
GTT RESOURCES: NASDAQ
DATA FEED FEES
We cover this topic in Green's
2012 Trader Tax Guide chapter 7 on Entities for Traders. Here's the
important update. We still believe that traders can avoid professional
rates with a family trading entity, except with IB.
Excerpt from Green's 2012 Trader Tax Guide:
DATA-FEED FEES
Nasdaq and some other market-data vendors offer multiple-tier pricing
for their market data, arranged through brokerage firm platforms. They
offer higher professional rates and lower non-professional rates. Unfortunately,
their policies often require higher professional rates for all entities,
including a family trading entity without outside investors.
Years ago, a Nasdaq official told us they would informally permit a family
trading entity without any outside investors to use the lower non-pro
rates. I asked a Nasdaq representative about this at the New York City
Traders Expo in February 2012 and he restated their policy to charge higher
pro rates on all entities without exception.
When I mentioned that I would pass on this conversation in our content,
he pointed out that the brokerage firm was Nasdaq’s customer, and
if the broker allowed non-pro rates to the entity, Nasdaq could not go
after the entity to pay the higher fees.
Most brokers allow a husband and wife entity to continue paying non-pro
data feed fees even though the vendors’ data provider agreements
call for higher professional data-feed fees on entity accounts. We only
know of two large online brokers — Interactive Brokers and TD Ameritrade
— that charge the higher professional rates at this time. But this
can change so check with your brokerage firm. Some brokers may require
an individual account connected to your entity account to avoid the higher
rates. In general, costs should not go up on entity accounts, so the tax
savings hit your bottom line. It’s best to inquire about these issues
with your broker before forming your entity.
Update: We heard TDA and their Think or Swim (TOS) branch still allow
non-pro rates if the trader pays a significant volume of trading commissions.
See our Updated Trader
Tax Center pages.
OLDER CONTENT: The vendors are more difficult, but they charge brokers
not customers. See the newer content above.
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.
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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 ServiceSM
or Nasdaq Quotation Dissemination ServiceSM.
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 ServiceSM or Nasdaq
Quotation Dissemination ServiceSM.
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 RegulationSM 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.
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