Filter executable futures with liquidity and open interest

A pre-ticket tradability exam

Editorial view: a futures chart is not a trade until the contract passes a tradability exam. The historical workflow treats liquidity as a screen that sits in front of the order pad, so thin markets are set aside before an order is sized.

A liquidity filter is a pre-trade screen that ranks contracts by how readily they can be bought or sold. Implementation cost is priced in that screen before any setup is allowed onto the order pad.

How the liquidity rank is built

A futures liquidity rank can be built by multiplying contract point value by a three-year maximum price-motion estimate, then by open interest, then by a volume factor usually between 1 and 4.

Relative contract liquidity is the comparative score that results. It is built from a contracts-to-trade count, total open interest, and a volume factor, and it is read only against other contracts in the same ranking.

The contracts-to-trade figure equals tick dollar value times the three-year maximum price excursion. Relative contract liquidity equals that contracts-to-trade figure times total open interest times the volume factor.

Open interest and volume confirmation

Open interest analysis uses the stock of outstanding contracts as a scale input so a ranking reflects how much size the market can absorb, not only a single session of prints.

Volume confirmation adjusts the liquidity score with a volume factor so unusually quiet or unusually heavy trading does not distort the ranking. The volume factor is a multiplier, usually between 1 and 4, taken as the greater of 1 and an exponential transform of volume relative to a 5000-contract reference.

In the historical workflow that transform is the greater of 1 and exp of (natural log of volume divided by natural log of 5000, minus 2).

Equal-dollar size and effective percent margin

An equal-dollar contract count, called an equal-dollar-profit contract count in the archive workflow, scales each listed future by contract value times the largest price change observed over the prior three years, so those entries share one dollar unit. It states how many contracts of one market are needed to match the same three-year dollar excursion as another market.

Effective percent margin equals dollar margin divided by the three-year price range of the contract’s dollar value, then multiplied by one hundred. Margin dollars are scaled by that three-year dollar price range and expressed as a percentage so capital lock-up can be compared across markets.

Editorial reading: once contracts share one dollar unit and a common margin language, implementation cost can be compared before a setup is treated as executable.

How to read the ranking display

Relative activity on the ranking display is marked by a right-hand dot count. The densest mark identifies the most active contracts. One dot or none identifies little activity.

Equal-dollar contract counts, effective percent margin, and relative contract liquidity are each read only against other entries in the same column.

An equity-market analogue

In equities, period volume expressed as a percentage of shares outstanding is treated as a turnover-rate proxy for trading liquidity. Share turnover is that period volume divided by shares outstanding.