Futures liquidity and open interest as an execution filter

Order choice as a two-step drill

Editorial interpretation: TradersWeek reads the archive workflow as a two-step execution drill. First drop futures books whose open-interest-and-volume composite cannot absorb intended size. Then convert the remaining names into equal-dollar contract counts and margin-to-range ratios so implementation cost, not the trade idea, decides which book is executable.

A liquidity filter is a pre-trade screen that keeps only markets whose ranked activity can absorb intended size and that surfaces implementation cost before an order is sent.

How the liquidity rank is formed

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

A single liquidity mark, or none, is used to flag little activity and therefore weaker speculative executability.

Open interest as a capacity input

Open interest analysis uses the stock of outstanding futures as a capacity input when judging whether a contemplated size is executable.

Equal-dollar counts and effective percent margin

Futures in the equal-dollar column are scaled so each row's contract count has the same dollar value, by multiplying contract value by the largest three-year price change.

The equal-dollar contract count equals tick dollar value times the three-year maximum price excursion. It states how many contracts of one futures product are required to match another product's three-year dollar price range.

Effective percent margin is posted margin divided by the three-year dollar range of the contract, then multiplied by 100. It expresses posted margin as a percentage of that range so capital locked per unit of historical range can be compared across names.

Relative contract liquidity

Relative contract liquidity equals the equal-dollar contract count times total open interest times a volume factor. It is a cross-market rank of how readily a futures book can be transacted, built from those three inputs.

That volume factor is the greater of 1 and the exponential of the natural log of volume divided by the natural log of 5000, minus 2. It is a multiplier, usually between 1 and 4, that adjusts the liquidity rank for unusually low or high volume.

Share turnover as an equity proxy

Equity trading activity can be treated as a liquidity proxy by expressing period volume as a percentage of shares outstanding. Share turnover is period share volume divided by shares outstanding, used as that equity-market proxy for trading liquidity.