Filtering futures by liquidity, open interest and equal-dollar size

An execution screen for listed futures

A listed-futures liquidity score can be assembled by multiplying contract point value, a three-year historical maximum price motion, open interest, and a volume adjustment usually between 1 and 4. Relative liquidity is then shown as a descending rank in which more marks indicate thicker activity and a single mark or none indicates little activity.

The same set of columns also reports contracts to trade for equal dollar profit and effective percent margin, so tick value and posted margin can be compared on one dollar scale.

Liquidity filter

A liquidity filter is a pre-trade screen that ranks listed futures by how readily size can be entered and exited, using price range, volume, and a mark scale that down-weights thin activity.

Relative contract liquidity is a descending ease-of-trade score built from equal-dollar contract count, total open interest, and a volume adjustment. It equals the equal-dollar contract count times total open interest times a volume factor. The volume factor is usually between 1 and 4, and in the relative-liquidity formula is the greater of 1 or the exponential of log volume divided by log 5000, minus 2.

Open interest analysis

Open interest analysis is a capacity check that treats outstanding contracts as the stock of size already in a market and multiplies that stock into the liquidity rank. Open interest also enters the listed-futures liquidity score as one of the multiplied terms, so the stock of size is part of both the score and the relative contract liquidity rank.

Futures contract selection

Futures contract selection is a comparison across names that equalizes dollar excursion and range-adjusted margin so a cheaper-looking tick or margin figure does not hide a harder book.

The equal-dollar-profit contract count multiplies contract value by the largest price change observed over the prior three years, so figures in that column share one dollar scale. Contracts to trade for equal dollar profit equals tick dollar value times the three-year maximum price excursion.

The three-year maximum price excursion is the largest price motion taken from the prior three years of history and is used both to size equal-dollar contract counts and to scale effective margin. Effective percent margin equals dollar margin divided by the three-year dollar price range of the contract, then multiplied by one hundred, so posted margin can be compared with historical range.

How to read the columns

Each column is a proportional comparison and is meaningful only against other contracts in the same column. A mark rank, an equal-dollar contract count and an effective percent margin are not interchangeable readings of the same name.

For shares, trading activity used as a liquidity proxy is period volume expressed as a percentage of shares outstanding. That share turnover rate is a separate proxy from the futures mark rank.

A supplied ranking snapshot

In the supplied ranking snapshot, short-term interest-rate futures sit at the top of the relative-liquidity list, ahead of equity-index and energy contracts.

Editorial note: read that order as a historical ranking snapshot of relative contract liquidity, not as a present-day market ranking.