In the second installment of our special series comparing Questrade’s and Virtual Brokers’ lowest stock trading commission plans, we take a look at what our study results showed us about the impact of market data to the overall cost of trading.  If you missed the first part, you can check it out here or if you’d like to read the full report you can access it here.

The Cost of Data

Of the different categories of cost to consider when looking at either Questrade’s or Virtual Brokers’ lowest trading commission plans, market data costs should be one that self-directed investors pay careful attention to.

Stock market data packages come in various levels of detail providing investors with a window into the action between buyers and sellers as they “debate” over what a stock or asset is worth.   Depending on the trading style, real-time streaming data may or may not be useful.  For example, longer term investors or swing traders may find streaming real-time quotes not to make a difference as to how they make their trading decisions and instead could use end of day data or snap quotes. On the other hand, for highly active traders, real-time streaming data is essentially a must-have in order to accurately place orders based on current market prices and to closely monitor trades.  Given the need for market data by active traders, discount brokerages use data packages as a way to generate revenue and incentivize the highly valuable active trading clients into certain types of trading packages.

While market data packages for Questrade and Virtual Brokers are not exactly identical in composition each discount brokerage does offer essentially the same market data access. In our pricing analysis we were able to create comparable sets of data packages between Questrade and Virtual Brokers in order to measure how market data costs impact the overall cost of trading.  We tested slightly tweaked versions of the “Package 2” from Virtual Brokers and Questrade’s Advanced Canadian plan (see table).   To ensure the data package for Virtual Brokers was equipped with streaming quotes, we added in the $35 per month fee for VB WebStreamer (their streaming data add on). Snap quotes on the VB Webtrader are standard (and free), however for our tests we assumed that the user would want/need streaming data.

As the table above shows, Virtual Brokers’ data plan in our model works out to be slightly more expensive on a monthly basis than does Questrade’s data plan.  For self-directed investors, these data packages demonstrate that in order to qualify for the lowest commission plan, they have to be willing to spend at least $1300 at Questrade and $1400 at Virtual Brokers annually on data (in the case of our model).  Even for modest portfolio sizes (e.g. <$25, 000) these are pretty hefty hurdles to overcome.

Rebate or Re”bait”

While both Questrade and Virtual Brokers offer rebates on data, these rebates require investors to trade certain minimum amounts per month to qualify.  For Questrade, there are two tiers of rebate, one for individuals who trade between 10 and 99 times per month, and another for those who trade 100+ times.  By comparison, Virtual Brokers offers its data rebate only after clients have made 150+ trades in the prior quarter (or 50+ times per month on average for 3 months).

Arguably, the amount of trading that has to be done in order to get a meaningful reduction in data is substantial at both discount brokerages. In Questrade’s case, trading up to 99 times in a month gets the same amount of rebate as trading 10 times per month – a rebate of $19.95.  In order to qualify for the best rebate, $89.95 per month, at least 100 trades or more have to be made in a month.  Similarly, in order to qualify for Virtual Brokers’ best commission rebate, clients have to make 150 trades or more in a quarter before they are eligible for a $60.75 per month rebate.  If an individual is trading at the activity levels that qualify them for rebates, they can expect to be spending thousands of dollars per year on equity commissions.

The Bottom Line

The take home lesson for self-directed investors considering these plans is that they should be mindful of the impact that data costs can have on the total cost of trading.  Even though low starting balances can be used to access these products, smaller portfolios have to work much, much harder to overcome the high cost burden the data fees introduce.  Perhaps the most important point for those considering these plans is that the advertised commission rates mask the actual cost of a trade substantially because of the high data cost.  In a future article we will outline the actual cost of a trade using these data plans to show the big difference that exists between actual costs and the advertised low commission rates.   Ultimately, whether or not these low commission plans are the most economical choices will depend heavily on portfolio size and trading activity.

Our next piece in the series covers the impact that order types can have on the cost of these two plans.

Correction Notice: April 22, 2013

This post has been revised to reflect the following corrections:

Table 1 has been revised to include MX level 2, ATS Level 1 and ARCA level 1 data. It was previously reported that Questrade’s data plan was $116.85 and Virtual Brokers’ data plan was $95.75.  Questrade’s streaming index quotes was reported at $6.95 per month but has been amended to $0 and thus the total for Questrade’s monthly plan as stated in the table is $109.90.  Virtual Brokers’ data package required the above mentioned add ons (plus a $1 for Dow Jones Index data) requiring an upward adjustment of $21.40.

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