2017issue C0156

Evaluating futures liquidity for executable contract selection

This archive article reconstructs a monthly futures liquidity board that first drops contracts failing a liquidity filter, justifies each drop with open interest and a volume factor, and only then compares surviving markets on equal-dollar size and effective percent margin.

Relative contract liquidity ranks listed futures only against other markets on the same board.
The liquidity filter is a keep-or-drop screen built from equal-dollar contract counts, open interest, and a volume factor.
Contracts with a single liquidity mark or none are treated as thinly active and leave the board.
Surviving markets are then compared on equal-dollar contract count and effective percent margin.

Entries in this reading3 entries

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

What relative contract liquidity ranks

Relative contract liquidity is a descending comparison of listed futures by how easily their contracts can be traded. It is meaningful only against other markets in the same ranking. Markets at the top of the ranking are treated as easiest to buy and sell. Markets at the bottom are treated as the most difficult.

The ranking is formed by multiplying the equal-dollar contract count by total open interest and then by a volume factor. The equal-dollar column weights every listed futures market onto one shared three-year dollar range so the contract counts are comparable. The equal-dollar contract count is the number of contracts needed so each market is scaled to that same three-year dollar price range.

How the liquidity filter rejects a contract

The liquidity filter is a keep-or-drop screen that ranks listed futures by how easily size can be bought and sold, using equal-dollar contract counts, open interest, and a volume factor. Contracts showing a single liquidity mark or none are described as thinly active and less suitable for speculative execution. Those names fail the screen and are not treated as executable.

Open interest analysis scales outstanding futures interest by a volume factor to judge whether a market’s full contract stock is readily executable. The volume factor never falls below one and otherwise rises with traded volume.

Choosing among markets that survive

Futures contract selection chooses among listed futures only after survivors of the liquidity screen are compared on equal-dollar range and margin relative to the three-year contract-value range. Contracts to trade for equal dollar profit equal tick dollar value times the three-year maximum price excursion. Effective percent margin is posted margin dollars divided by the three-year range of contract dollar value, expressed as a percentage.

For stocks, volume over a period as a percentage of shares outstanding is offered as a theoretical proxy for trading liquidity.

Contracts needed for equal-dollar futures profit

Among contracts that already pass the monthly liquidity screen, this board shows how many lots of each market are required to match the same three-year dollar profit. Crude oil, gasoline and ULSD sit at one lot; Eurodollar needs 41 and 30-day Fed funds 34. Use this size comparison only after open interest and the volume factor have ranked a market as executable. Numbers are taken from the published Trading Liquidity: Futures table, not from counting the liquidity dots.Commodity futures (monthly liquidity board) · Monthly board for January 2017, using a three-year lookback · 2014-01-01T00:00:00.000Z to 2017-01-31T00:00:00.000Z

Contracts to trade equals tick dollar value times the three-year maximum price excursion; every listed market is scaled to the same dollar profit. Relative liquidity dots are a separate ranking and are not plotted here.

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

32 of 51 in the Futures contract selection track

201758-58 pp.Next on Futures contract selectionA relative liquidity rank for choosing an executable futures contractScale every futures listing to a shared dollar exposure with an equal-dollar contract count from tick value and a three-year maximum price move.

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