Construct a futures liquidity filter from open interest and range

Build a comparable liquidity score

A liquidity filter is a pre-trade screen that ranks listed futures by how readily a comparable dollar position can be entered and exited. It uses range, open interest, and volume rather than headline activity alone.

A relative futures-liquidity score can be constructed by multiplying contract point value, a three-year maximum price excursion, open interest, and a volume adjustment.

Equalize contracts by three-year dollar range

An equal-dollar contract count is the number of contracts of one market needed to match another market's potential dollar excursion. It is obtained by multiplying contract value by the largest price change observed over the prior three years, putting different listings on a comparable dollar-excursion basis.

Weight that size by open interest and volume

Relative contract liquidity is that equal-dollar contract count times total open interest times the volume factor. The result is a cross-market score and is meaningful only as a comparison within the same column.

Open-interest weight is the outstanding position stock used as a size term in the liquidity score. A market with a large book of existing contracts ranks as easier to trade than a market with the same range but few open positions.

The volume factor leaves busy markets near a floor of one and down-weights thinner books. The construction usually applies a volume factor in the range of 1 to 4 so contracts with little trading activity are down-weighted. The volume factor is the greater of 1 and the exponential of the natural log of volume divided by the natural log of 5000, minus 2.

Under this ranking, contracts with little or no activity are treated as harder to buy and sell and therefore less suitable as an execution venue for speculative orders.

Compare posted margin with range-scaled margin

Effective percent margin is posted margin dollars divided by the three-year dollar range of the contract, then multiplied by one hundred. Capital lock-up is compared to historical range instead of to notional size alone.

Posted percent margin and effective percent margin can order the same listing differently. In the 2018 snapshot a two-year note shows 0.2 versus 6.2, while a bitcoin futures listing shows 41.5 versus 25.5.

Choose a contract after the screen

In the 2018 ranking produced by this method, equity-index and Treasury listings occupy the most liquid ranks, while several agricultural, currency, and metal listings sit near the bottom of the same list.

Futures contract selection is choosing which listed expiry and product to trade after the liquidity screen and the two margin ratios have placed that contract in a comparable, regime-aware set. Every futures listing is not treated as interchangeable.