2017issue C1158

Build a futures liquidity filter from open interest

A listed-futures liquidity filter scales every contract to the same dollar excursion, then multiplies that equal-dollar contract count by total open interest and a volume factor. Markets are ordered from highest to lowest on that relative liquidity rank.

Equal-dollar contract count is tick dollar value times the three-year maximum price excursion, so each listed future is scaled to the same dollar size.
Relative liquidity rank multiplies that count by total open interest and a volume factor, then orders markets from highest to lowest.
Thinner open interest lowers the score even when the historical dollar range is large, and names with one activity unit or none are classified as weaker execution candidates.
Effective percent margin compares dollar margin with the three-year range of contract dollar value only after those ranks have been lined up across the board.

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Liquidity filter46 readings Open interest analysis46 readings Current trackFutures contract selection51 readings

A liquidity filter is a pre-trade screen that ranks listed futures by how readily an equal-dollar size can be absorbed. It uses historical range, open interest, and volume rather than a price pattern.

The relative liquidity rank is a descending cross-sectional score equal to equal-dollar contract count times open interest times a volume factor.

Scale every contract to equal dollars

The equal-dollar contract count is tick dollar value multiplied by the three-year maximum price excursion. It measures how many contracts of one listed future are required to match another future's three-year dollar price excursion.

Build the relative liquidity rank

A relative liquidity score for listed futures is formed by multiplying the equal-dollar contract count by total open interest and by a volume factor, then ordering markets from highest to lowest.

The same ranking is also described as contract point value times a three-year maximum price move times open interest times a volume adjustment that commonly ranges from 1 to 4.

Read open interest as thickness

Open interest analysis reads the outstanding contract stock as a thickness input. Thinner open interest lowers the relative liquidity score even when the historical dollar range is large.

Apply a volume factor

The volume factor used in that score is the greater of 1 and exp(ln(volume) / ln(5000) - 2). It is a multiplier equal to the greater of 1 and an exponential of logged volume versus a 5000-contract reference, used to adjust very quiet or very active markets.

Equal-dollar futures contract counts, November 2017

Each bar is how many of that listed contract you would have to trade to match the same three-year dollar excursion as the others. After that scaling, Eurodollar, corn and two-year notes still need a double-digit count, while WTI, the E-mini equity indexes and palladium scale to one contract. Markets are shown in the magazine’s relative-liquidity order, not sorted by this column. Figures come from the November 2017 Trading Liquidity: Futures table.Listed commodity and financial futures · November 2017

Equal-dollar count equals tick dollar value times the three-year maximum price excursion. The published rank order multiplies that count by open interest and a volume factor (the greater of 1 or exp(ln volume / ln 5000) − 2); this series is the scaling input, not the final liquidity score.

Read each column only against its peers

Each numeric column is a proportional measure that is meaningful only when compared with other contracts in that same column.

Flag contracts with little activity

Contracts marked with one activity unit or none are classified as having little activity and therefore as weaker candidates for speculative execution.

Compare margin intensity across the board

Effective percent margin is dollar margin divided by the three-year range of contract dollar value, then multiplied by 100. Expressed as a percent, it lets capital lock-up be compared across products.

Futures contract selection chooses which listed product and expiry to trade only after the equal-dollar liquidity rank and margin-intensity measures have been compared across the board.

A stock-market analogue

For listed stocks, trading activity is treated as a liquidity proxy equal to period volume expressed as a percentage of shares outstanding. That share turnover is used as a stock-market analogue of trading liquidity.

Educational research material, not investment advice. Historical source context does not establish present-day performance.

37 of 51 in the Futures contract selection track

201858-58 pp.Next on Futures contract selectionEvaluating futures liquidity for executable contract choiceA liquidity filter ranks listed futures from contract point value, a three-year price-motion estimate, open interest, and a volume factor usually between 1 and 4.

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