Use a futures liquidity rank as a pre-trade checklist

A ranking table as a pre-trade screen

A futures liquidity rank is built by multiplying contract point value, a three-year maximum price excursion, open interest, and a volume factor so contracts can be ordered by how easily they can be transacted.

The volume adjustment in the rank is the greater of 1 and an exponential of the log of volume divided by the log of 5000, minus 2. The volume-factor is a low-or-high activity multiplier, typically from 1 to 4, that penalizes thinly traded contracts in the liquidity rank.

Relative-contract-liquidity is the comparative score that multiplies the equal-dollar contract count by open interest and a volume adjustment so listed futures can be ordered from easiest to hardest to transact.

Apply a liquidity filter first

Relative liquidity is marked with activity dots. A single marker or none is treated as thin activity and therefore a weaker candidate when a speculator needs an executable size.

A liquidity-filter keeps only contracts with enough activity markers, open interest, and volume to support the intended order.

Confirm open interest can absorb the size

Open interest enters the relative-liquidity score as a direct multiplier of the equal-dollar contract count and the volume factor.

Open-interest-weight is the outstanding contract inventory used as a multiplier when judging whether an intended size is executable.

Screen contract count and margin

The equal-dollar column states how many contracts of one market must be traded to match another market's three-year dollar range, so required size, and the commission load that comes with that size, can be compared across names. That figure is contracts-to-trade: how many contracts of one futures market must be worked to match another market's three-year dollar price range.

Effective percent margin is margin dollars divided by the three-year dollar range of the contract, then multiplied by one hundred. Percent margin and effective percent margin are shown together so capital lockup can be compared with each contract's historical dollar range before an order is sent.

Effective-percent-margin is initial margin expressed as a percentage of the contract's three-year dollar price range, used to compare how tightly capital is locked relative to historical range. Implementation-cost is the combined drag from extra contracts needed for equal dollar exposure, margin lockup, and poorer fill conditions in thin names.

What the March 2015 list showed

In the March 2015 snapshot, the E-mini S&P 500 required 5 contracts for equal dollar profit and sat at the top of the relative-liquidity list, while 30-day fed funds required 823 contracts and showed no activity markers.

Editorial note: the contrast is a checklist example, a name with activity and a small contracts-to-trade count versus a name with no activity markers and a large required size.