2016issue C0655

Filter futures by liquidity, open interest, and margin cost

Editorial view: treat a futures chart as untradeable until the contract clears a three-part execution screen. The archive workflow ranks how readily the book can be transacted, checks whether open interest can absorb the size, and compares how much capital the same multi-year dollar range consumes.

Relative contract liquidity is a descending score of how readily a listed futures book can be transacted, assembled from contracts to trade, outstanding open interest, and a volume factor.
Contracts to trade rescale each listing so a three-year extreme price move represents a comparable dollar amount, then open interest is the capacity input for whether that size can be absorbed.
Effective percent margin is dollar margin divided by the three-year range of contract dollar value, expressed as a percentage, and is compared with stated percent margin to show how much capital a contract ties up.
The liquidity, size, and margin columns are proportional measures that are meaningful only when compared with other contracts in the same column.

Entries in this reading3 entries

Current trackCommission analysis37 readings Liquidity filter118 readings Open interest analysis118 readings

Three screens before a futures chart is executable

Editorial view: TradersWeek treats a futures chart as untradeable until the contract clears a three-part execution screen. That screen is an activity-based liquidity filter, an open-interest capacity check, and a margin-cost comparison that shows how much capital the same multi-year dollar range consumes.

A listed future’s relative liquidity rank is assembled from contract point value, a three-year extreme price move, open interest, and a volume adjustment.

How relative contract liquidity is assembled

Relative contract liquidity is a descending score of how readily a listed futures book can be transacted. It is assembled from an equal-dollar size multiple, outstanding open interest, and a volume adjustment.

The contracts-to-trade figure is that size multiple. It scales each listing so tick dollar value times the three-year maximum price excursion represents a comparable dollar move.

Relative contract liquidity is also specified as the contracts-to-trade count multiplied by total open interest multiplied by a volume factor.

The volume factor

The volume adjustment in that rank is described as a factor that commonly falls between one and four when volume is unusually low or high.

One stated form of the volume factor is the greater of one and the exponential of log volume divided by log 5,000, minus two. That multiplier adjusts the liquidity score when volume is unusually thin or crowded.

Open interest as a capacity check

Open interest is the stock of outstanding futures used as a capacity input when judging whether size can actually be absorbed.

In the relative-liquidity specification, that open-interest stock is multiplied by the contracts-to-trade count and by the volume factor. The product is the capacity-aware rank of how readily the outstanding book can be transacted.

Margin cost against the same dollar range

Effective percent margin equals dollar margin divided by the three-year range of contract dollar value, then multiplied by one hundred.

Stated percent margin and effective percent margin are comparison tools for how much capital a contract ties up relative to its historical dollar range.

Posted and effective margin by listed futures contract

Posted percent margin and effective percent margin from the June 2016 Trading Liquidity: Futures table. Effective margin is posted margin dollars divided by the contract’s three-year dollar range, times 100. Energy names look expensive on posted margin but cheap against that range; short-rate products reverse the pattern.Listed commodity futures · June 2016 monthly ranking

Values are the printed table, not the CBOT trading-floor photograph. Relative-liquidity dots are a graphic rank and are omitted because several top names overflow the printed scale. Each column is only comparable across contracts in the same monthly ranking.

Read each column only against other contracts

The liquidity, size, and margin columns are described as proportional measures that are meaningful only when compared with other contracts in the same column.

The relative-liquidity list is ordered so that contracts at the top are those whose outstanding books are easiest to transact and those at the bottom are the hardest.

For equities, period volume as a percentage of shares outstanding is presented as a turnover-rate proxy for trading liquidity.

What the screen is for

Editorial view: the three columns answer whether an order is executable and how much capital the same multi-year dollar range consumes, not whether the plotted idea is right. A listing is chosen only after the liquidity rank, the open-interest capacity check, and the margin-cost comparison have been read against other contracts.

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

21 of 32 in the Commission analysis track

201621-21 pp.Next on Commission analysisComparing dollar-index futures execution costs and liquidityIn 2016 the same dollar-basket idea sat on two U.S. venues, so futures-contract-selection had to compare currency weights, rebalancing rules, and option-overlay-availability before either listing was treated as the trade.

All readings on this track · 32 readings

By fieldLiquidity and costs119 readings By year201678 readings

All 37 readings tagged Commission analysis

Also on Commission analysis5 readings

2010A pre-trade liquidity screen for futures contracts 2012Filter futures contracts by liquidity and implementation cost 2012Ranking futures liquidity for executable orders 2013Filter futures by liquidity, open interest, and effective margin 2015Filter unexecutable futures by liquidity, open interest, and margin