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2013issue C0174

Equal-dollar open interest as a futures liquidity filter

A futures liquidity filter first converts each market into an equal-dollar contract count, then scores whether open interest and volume can absorb that size. Markets are ordered by relative contract liquidity, not by the setup alone.

  • Put futures on one dollar scale with contracts to trade, defined from tick dollar value and the three-year maximum price excursion, before asking whether the book can absorb that size.
  • A liquidity filter multiplies that comparable size by open interest and a volume factor, typically between 1 and 4, so thin volume is down-weighted.
  • Open interest analysis scales outstanding contract inventory by the equal-dollar count and the volume factor to judge whether a market can support speculative size.
  • Relative contract liquidity only ranks markets against each other. Table columns are proportional comparisons and are meaningful only against other entries in the same column.
Entries in this reading2 entries
Liquidity filter118 readingsCurrent trackOpen interest analysis118 readings

Size the contract before scoring liquidity

A liquidity filter ranks how easily a futures contract of comparable dollar size can be entered and exited. The score uses price range, open interest, and a volume adjustment.

Contracts to trade are the number of contracts of one futures market needed to match another market's three-year dollar profit potential. Contracts needed for equal dollar profit can be defined as tick dollar value times the three-year maximum price excursion, which places listed markets on a common dollar scale.

Form the liquidity rank

A futures liquidity rank can be formed by multiplying contract point value, a three-year maximum price move, open interest, and a volume adjustment typically between 1 and 4.

The volume factor is that multiplier. It is often between one and four, down-weighting thin volume and up-weighting very heavy volume when liquidity is scored.

Read open interest on an equal-dollar scale

Open interest analysis uses outstanding contract inventory, scaled by an equal-dollar contract count and a volume factor, to judge whether a market can support speculative size.

Relative contract liquidity orders futures by how readily their full open-interest stock can be traded. It can be computed as contracts to trade times total open interest times a volume factor equal to the greater of 1 or exp(ln(volume)/ln(5000) - 2).

Ordering markets by relative contract liquidity places easier-to-trade contracts above those that are harder to buy and sell in size.

Compare margin and table columns

Effective percent margin compares capital locked per unit of historical range. Calculate it as dollar margin divided by the three-year range of contract dollar value, then multiply by 100.

Column values in such a liquidity table are proportional comparisons. They are meaningful only against other entries in the same column.

A share-turnover proxy for equities

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

Educational research material, not investment advice. Historical source context does not establish present-day performance.
10 of 20 in the Open interest analysis track
201363-63 pp.Next on Open interest analysisFilter futures by open interest and relative liquidityA futures liquidity ranking multiplies contract point value, a three-year maximum price move, open interest, and a volume adjustment usually scaled from 1 to 4.
All readings on this track · 20 readings
  1. 1988Wave-count consensus and open-interest confirmation
  2. 1990Calibrating volume and open interest at support and resistance
  3. 1997Grading volume and open interest after moving-average crosses
  4. 2003Constructing an expiration settlement map from listed open interest
  5. 2010Futures liquidity filter for equal-dollar size and open interest
  6. 2010Screen futures for tradeable liquidity before sizing
  7. 2011Screen futures liquidity with open interest and equal dollar size
  8. 2011Construct a daily initiator filter from lead-contract price, open interest, and volume
  9. 2012Ranking futures markets by executable liquidity
  10. 2013Equal-dollar open interest as a futures liquidity filter
  11. 2013Filter futures by open interest and relative liquidity
  12. 2015Filter futures contracts by open interest and volume
  13. 2015Screen listed futures for executable liquidity first
  14. 2015Money-flow lookback versus aggregated open interest
  15. 2016Ranking futures by executable liquidity and open interest
  16. 2018Futures liquidity and open interest as an execution filter
  17. 2019Evaluate futures liquidity with open interest and equal-dollar filters
  18. 2019Screen futures contracts by open interest and liquidity
  19. 2020Filter futures orders by liquidity and open interest
  20. 2020Ranking futures liquidity before you place the order
By fieldLiquidity and costs119 readingsBy year201398 readings
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