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2018issue C0858

Filter futures execution by liquidity and margin

Relative futures liquidity can be scored from contract point value, a three-year maximum price move, open interest, and a volume adjustment, then ranked by how readily that interest can be transacted. TradersWeek editorial reading: treat that ranking, with equal-dollar contract counts and effective percent margin, as a pre-trade filter before any directional idea is sized.

  • Relative futures liquidity is scored from contract point value, a three-year maximum price move, open interest, and a volume adjustment, then ranked by how readily that interest can be transacted.
  • An equal-dollar contract count states how many contracts of each market match the same three-year dollar price excursion, so open interest can be compared on a common dollar scale.
  • Effective percent margin puts posted margin against the contract’s three-year dollar range, so committed capital is visible before an executable size is chosen.
  • TradersWeek editorial reading: use the descending ranking as a liquidity filter, and do not size a directional idea until open interest, equal-dollar contract counts, and effective margin make the order look implementable.
Entries in this reading3 entries
Current trackCommission analysis37 readingsLiquidity filter118 readingsOpen interest analysis118 readings

Read the ranking before the idea is sized

The archive describes a relative-liquidity score for futures. Contract point value, a three-year maximum price move, open interest, and a volume adjustment are combined, and markets are then ranked by how readily that interest can be transacted.

TradersWeek editorial reading: convert that ranked table into a liquidity filter. Let open interest analysis, equal-dollar contract counts, and effective percent margin decide whether an order is implementable before any directional idea is sized.

Score how readily interest can be transacted

A liquidity filter is a pre-trade screen that ranks contracts by how readily size can be bought or sold, using volume, open interest, dollar range, and related implementation costs.

The same relative-liquidity score is also specified as the equal-dollar contract count times total open interest times a volume factor. Markets are then placed in rank order by how readily that interest can be transacted.

Put open interest on an equal-dollar scale

An equal-dollar column reports how many contracts of each market must be traded to match the same three-year dollar price excursion. That equal-dollar contract count is computed as tick dollar value times that three-year maximum excursion.

Open interest analysis weights a contract by outstanding open interest so a deep book scores as easier to implement than a thin book with the same point value. Multiplying the equal-dollar contract count by total open interest places that outstanding interest on a shared dollar scale.

Scale the score when volume is unusual

The volume adjustment is described as a multiplier usually between 1 and 4 that scales the score for unusually low or high traded volume.

The same volume factor is also specified as the greater of 1 or the exponential of log volume over log 5000 minus 2.

Compare posted capital with the contract range

Commission analysis compares posted margin and effective margin with the contract’s multi-year dollar range so committed capital is visible before an order is chosen.

Effective percent margin is posted margin dollars divided by the three-year dollar range of the contract, then multiplied by 100. Committed capital can then be compared with historical contract-value range rather than with notional alone.

Percent margin and effective percent margin are presented together so posted capital can be compared across contracts before an executable size is chosen.

Posted versus effective percent margin for ranked futures

Read posted percent margin against effective percent margin—margin dollars divided by the contract’s three-year dollar range. Figures are taken from the August 2018 Stocks & Commodities futures liquidity table, still sorted by relative contract liquidity. Names toward the left are easier to transact; a tall effective-margin bar means posted capital already covers a large share of that contract’s recent range, so treat size as unimplementable until this filter is passed.
Read posted percent margin against effective percent margin—margin dollars divided by the contract’s three-year dollar range. Figures are taken from the August 2018 Stocks & Commodities futures liquidity table, still sorted by relative contract liquidity. Names toward the left are easier to transact; a tall effective-margin bar means posted capital already covers a large share of that contract’s recent range, so treat size as unimplementable until this filter is passed.Listed U.S. commodity and financial futures · August 2018 listing; three-year range used for effective margin

Effective percent margin equals margin value ($) divided by the three-year price range of contract dollar value, times 100, as the source defines it. Row order is the magazine’s relative-liquidity ranking, not a sort on margin. Expiries are those printed in the August 2018 listing (mostly September 2018).

Compare each column only with itself

A descending relative-liquidity ranking places the easiest-to-transact contracts at the top and the hardest at the bottom. Each column is only meaningful when compared with other markets in that same column.

A share-market liquidity proxy

For listed shares, period volume expressed as a percentage of shares outstanding is offered as a turnover-rate proxy for trading liquidity. That share turnover figure is the stock-market analogue described in the archive, not a futures ranking column.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
29 of 32 in the Commission analysis track
201861-61 pp.Next on Commission analysisCommission analysis for brokerage execution costsScreen firms first for whether they handle the intended instrument, then choose between full-service-brokerage and discount-brokerage.
All readings on this track · 32 readings
  1. 1985Matching ticket size to negotiable commission schedules
  2. 1985Minimum tickets can price a small book out of its own exit
  3. 1992Stop-order slippage as an execution cost filter
  4. 1993Cost-aware walk-forward evaluation of pattern-detector signals
  5. 2001Audit high-turnover operating conditions as one procedure
  6. 2002Front-load futures commission and slippage
  7. 2005Inactive account fees as hidden implementation cost
  8. 2010A pre-trade liquidity screen for futures contracts
  9. 2011Currency option venues, spreads, clearing, and premium cost
  10. 2012Filter futures contracts by liquidity and implementation cost
  11. 2012Futures commission versus one tick of cost
  12. 2012Ranking futures liquidity for executable orders
  13. 2013Filter option day trades by spread, volume, and fees
  14. 2013Filter futures by liquidity, open interest, and effective margin
  15. 2014Book futures data fees as implementation cost
  16. 2015Use a futures liquidity rank as a pre-trade checklist
  17. 2015Filter unexecutable futures by liquidity, open interest, and margin
  18. 2015Futures liquidity ranking as an execution filter
  19. 2015Filtering option trades by bid-ask width
  20. 2016Exchange quote fees as execution costs and liquidity filters
  21. 2016Filter futures by liquidity, open interest, and margin cost
  22. 2016Comparing dollar-index futures execution costs and liquidity
  23. 2016A futures liquidity ranking as a screen for executable orders
  24. 2017Filter a futures board by liquidity, open interest, and implementation cost
  25. 2017Filter futures contracts by liquidity and margin cost
  26. 2017How residency rules raise futures implementation costs
  27. 2018Screen listed futures by liquidity, open interest, and margin
  28. 2018Contract selection is the first filter on competing bitcoin futures
  29. 2018Filter futures execution by liquidity and margin
  30. 2018Commission analysis for brokerage execution costs
  31. 2019Ranking futures liquidity before you size the order
  32. 2020Brokerage selection as an implementation-cost problem
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