Why TD Ameritrade Falls Short for Options Traders: A Comparative Analysis with Interactive Brokers
For semiprofessional options traders like myself, Interactive Brokers (IB) is clearly the superior choice, as it outweighs the limitations of TD Ameritrade (TD AmeriTrade) in several critical areas. While TD Ameritrade offers some valuable features for research, particularly in the Think or Swim (TOS) platform, it fails to meet the needs of professional options traders. In this article, we will explore why Interactive Brokers is the recommended choice for options traders.
Advantages of Interactive Brokers for Options Trading
Interactive Brokers (IB) is widely recognized for its robust and efficient trading platform, offering several significant advantages over TD Ameritrade for options traders:
1. Direct Order Execution
One of the most critical differences between IB and TD Ameritrade is how they handle order execution. IB directly sends orders to exchanges without relying on market makers. TD Ameritrade, on the other hand, sells your orders to market makers and then passes them on, which can potentially result in slower fills and less favorable prices. This practice was recently the subject of a class-action lawsuit, where a judge approved a lawsuit against TD Ameritrade for such tactics, further highlighting the inefficiencies of their order routing process.
2. Greater Flexibility in Placing Orders
IB allows users to place more orders than their current buying power allows, retaining excess buying power until an order is executed. This feature is particularly advantageous for research and analysis. For instance, I often place hundreds of orders in the hopes of identifying those that may go through immediately or have a better chance of execution at a favorable price. In contrast, TD Ameritrade reserves your buying power as soon as you place an order, severely limiting your ability to place multiple orders. This restriction essentially makes TD Ameritrade a less flexible choice for professional options trading, where rapid and numerous order placements can be crucial.
3. More Accurate Margin Calculations
When it comes to margin calculations, IB typically provides users with more favorable conditions. Specifically, IB tends to release more buying power post-execution compared to TD Ameritrade. While both brokers may occasionally give additional buying power, the long-term trend is that IB consistently provides more margin flexibility. This enhanced margin flexibility allows options traders to explore various strategies without worrying about account liquidity constraints.
4. Arbitrage Opportunities
IB is a preferred choice for options arbitrage. Unlike TD Ameritrade, which may invalidate certain orders or require excessive margin due to perceived risks, IB often allows these orders to go through. This can potentially lead to profit opportunities when options are mispriced. For instance, when TD Ameritrade might interpret some trades as too risky, IB allows these trades, sometimes resulting in profits from arbitrage opportunities. This is a valuable feature for traders seeking to exploit pricing discrepancies.
5. Superior Options Chain Screen
IB's options chain screen in TradeStation (TWS) offers superior functionality compared to TD Ameritrade's Think or Swim (TOS) platform. The screen provides a more comprehensive and clearer view of options opportunities, enabling traders to identify and capitalize on potential trades more effectively. While both platforms have their strengths, I consistently find that IB's options chain screen allows me to see more opportunities and make better-informed decisions.
6. Lower Commissions
Commissions play a significant role in trading costs, and Interactive Brokers offers lower rates than TD Ameritrade. While IB charges $0.70 per option with no need to negotiate, TD Ameritrade's commissions are significantly higher and can be negotiated only on a case-by-case basis. Lower trading costs are crucial for professional options traders looking to maximize profits.
7. Additional Option Analysis Features
Interactive Brokers also offers advanced option analysis features such as those that help in discovering the best option combinations based on specific criteria and stock price projections. These features are particularly useful for sophisticated traders and can provide valuable insights that improve trading outcomes.
When to Use TD Ameritrade for Research
Despite its limitations in trading, TD Ameritrade serves as a valuable platform for research. Its modeling and historical data capabilities in Think or Swim (TOS) are superior to those in IB's platform. TD Ameritrade is often faster and more responsive in research applications, making it a preferred choice for traders who need to model option performance and historical price movements.
In conclusion, while TD Ameritrade offers some advantages for research, it falls short for professional options trading where speed, flexibility, and cost efficiency are paramount. Interactive Brokers is the clear choice for traders seeking to maximize their chances of success in the options market.