2013issue C0664

Futures liquidity filters for executable contract selection

Relative contract liquidity ranks listed futures from contract size, a three-year price excursion, open interest, and a volume factor. Equal-dollar-profit counts and effective percent margin then place those markets on a common exposure and capital-lock-up scale.

A liquidity filter keeps only contracts with enough activity, book depth, and volume to be treated as executable, and sets thin books aside.
Relative contract liquidity multiplies contract point value by a three-year maximum price move, then by open interest, then by a volume factor, and each column is read against other contracts in the same ranking.
Open interest raises a contract's rank after size and volume are applied, while markets with one activity unit or none are treated as low-activity and less suitable for speculative execution.
An equal-dollar-profit count scales each listed market to the same dollar opportunity, and effective percent margin compares capital lock-up across those markets.

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Liquidity filter46 readings Open interest analysis46 readings Current trackFutures contract selection51 readings

A pre-trade liquidity filter

A liquidity filter is a pre-trade screen that keeps only contracts with enough activity, book depth, and volume to be treated as executable, and sets thin books aside. Markets marked with one activity unit or none are treated as low-activity and therefore less suitable for speculative execution.

Futures contract selection, as defined here, means choosing among listed futures by comparing liquidity rank, equal-dollar contract counts, and margin efficiency rather than by directional thesis alone. Relative contract liquidity is a comparative measure only: each column is meaningful when read against other contracts in the same ranking.

How the liquidity rank is formed

A futures liquidity rank can be formed by multiplying contract point value by a three-year maximum price move, then by open interest, then by a volume factor. Relative contract liquidity is that cross-market ranking of how easily a futures book can be traded, combining contract size, a multi-year price excursion, open interest, and a volume adjustment.

Open-interest analysis uses outstanding contract count as a multiplicative input so a large open book raises a market's rank after size and volume are accounted for. Open interest enters the relative-liquidity score as a multiplicative term, so a larger outstanding book raises a contract's rank after size and volume are applied.

The volume factor

The volume factor is a low-activity adjustment applied to the liquidity rank. The volume factor in that rank is the greater of 1 and an exponential of the natural log of volume over the natural log of 5000, minus 2.

Equal-dollar counts and margin lock-up

An equal-dollar-profit count is defined as tick dollar value times the three-year maximum price excursion, so each listed market is scaled to the same dollar opportunity. It is how many contracts of one market must be traded to match another market's three-year dollar price excursion.

Effective percent margin is posted margin divided by the three-year range of contract dollar value, then multiplied by one hundred. Posted margin is expressed as a share of the three-year dollar range of the contract and is used to compare capital lock-up across markets.

For listed shares, a turnover-style liquidity proxy is period volume divided by shares outstanding. That equity-turnover-proxy is a stock-market analogue for trading liquidity.

Educational research material, not investment advice. Historical source context does not establish present-day performance.

18 of 51 in the Futures contract selection track

201364-64 pp.Next on Futures contract selectionFilter listed futures by liquidity and open interest firstA liquidity-filter ranks listed futures by how readily size can be executed, using range, activity, and cost inputs rather than a price forecast.

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