2014issue C0658
A two-gate liquidity filter for listed futures
A historical futures snapshot first set aside markets whose activity marks made an exit look hard, then compared the rest on equal-dollar contract counts and effective percent margin so implementation cost was visible before an order could fire.
- A liquidityFilter starts by dropping contracts marked with one or no activity dots, which the snapshot treated as little activity and as harder to buy or sell.
- Surviving markets are ordered by relativeContractLiquidity, which multiplies an equal-dollar contract count by total open interest and a volumeFactor usually between 1 and 4.
- contractsToTradeForEqualDollarProfit and effectivePercentMargin then show how many contracts match the same dollar profit unit and how posted margin sits against the three-year range of contract dollar value.
- Each column is a proportional measure and is meaningful only when a contract is compared with other contracts in the same column.
A pre-trade liquidity screen
The archive records a listed-futures liquidity snapshot used as a pre-trade screen. The liquidityFilter keeps only contracts with enough activity, open interest, and comparable sizing to be entered and exited while implementation cost is still visible.
Drop thin activity first
Markets shown with one or no activity dots were classified as having little activity and as harder to buy or sell than markets with many dots.
How relative contract liquidity is built
The futures liquidity ranking multiplies contract point value by a three-year maximum conceivable price move, then by open interest, then by a volumeFactor that is usually between 1 and 4.
relativeContractLiquidity is a comparative score: the equal-dollar contract count times total open interest times that volumeFactor, so markets can be ordered by how readily a full position can be traded.
One stated form of the volumeFactor takes the greater of 1 and an exponential transform of volume relative to a five-thousand-contract baseline. The multiplier down-weights thin volume and up-weights heavy volume.
Equal-dollar counts and effective margin
contractsToTradeForEqualDollarProfit equals tick dollar value times the three-year maximum price excursion, so every count in that column is scaled to the same potential dollar profit. It is the number of contracts of one market needed to match another market's dollar profit potential.
effectivePercentMargin is posted dollar margin divided by the three-year range of the contract's dollar value, then multiplied by one hundred. Capital in use is judged against realized price span rather than notional size alone.
What the snapshot showed
In the tabulated snapshot the E-mini S&P 500 sat at the top of the relative-liquidity order, with a 4.1 percent margin, a 9.6 effective percent margin, and 5 contracts to trade for equal dollar profit.
Matching the equal-dollar profit unit required 240 Eurodollar contracts and 197 two-year Treasury-note contracts.
Columns only compare like with like
Each column is a proportional measure and is meaningful only when a contract is compared with other contracts in the same column.
Equity trading liquidity was treated separately as shareTurnover: total volume for a period expressed as a percentage of shares outstanding, used as a proxy for how quickly the float changes hands.
All readings on this track · 10 readings
- 2012Filter listed futures by relative contract liquidity
- 2013Score option liquidity before you commit the order
- 2013Evaluate futures liquidity before committing margin
- 2014A two-gate liquidity filter for listed futures
- 2015A liquidity filter to choose executable futures
- 2016Lookback and direction-test parameters for a liquidity-plus-trend screen
- 2016Same-dollar liquidity-filter for listed futures
- 2016Liquidity filter for executable futures orders
- 2017How to read a futures liquidity filter
- 2020Pre-trade liquidity filter for listed futures