2013issue C0964

A pre-trade liquidity filter for futures contract selection

Convert every listed futures market to the same dollar opportunity, then keep only names whose open interest and volume-adjusted rank can carry that size. Effective percent margin shows how much of the three-year range posted margin ties up.

Futures contract selection begins by scaling every listed market to the same potential dollar outcome with an equal-dollar contract count.
A liquidity filter then keeps only names whose open interest and volume factor can absorb that intended size.
Effective percent margin divides posted margin dollars by the contract's three-year dollar range, and it need not match posted percent margin.
Figures in each comparison column are proportional measures and are intended to be read only against other contracts in the same column.

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

The first execution step

The archive workflow treats futures contract selection as a comparison that happens before an order is sent. Each listed market is placed on a common dollar scale. Open interest is the stock of outstanding futures positions and is used as a capacity input when judging whether an order is executable.

A liquidity filter is the pre-trade screen that keeps only futures names whose depth and activity can absorb the intended order size. Futures contract selection is the later choice of which listed contract to trade after liquidity, open interest, and equal-dollar sizing have been compared.

Equal-dollar contract count

An equal-dollar column can scale every listed futures market to the same potential dollar outcome by multiplying contract value by the largest price change observed over three years. That three-year price excursion is the largest price move observed over a three-year window, and it is used to put different contracts on a common dollar scale.

The same equal-dollar contract count can also be written as tick dollar value times the three-year maximum price excursion, so the resulting counts are comparable in dollar terms. Equal-dollar contract count is how many contracts of one market are needed to match another market's dollar opportunity after both are scaled to the same historical range.

Open interest and the volume factor

A futures liquidity rank can be assembled by multiplying contract point value, a three-year maximum price move, open interest, and an activity factor usually set between 1 and 4. Relative contract liquidity is the cross-market rank of how easily a contract's outstanding positions can be traded, built from size, open interest, and activity.

Relative ease of trading can also be scored as the equal-dollar contract count times total open interest times a volume factor equal to the greater of 1 and exp(ln(volume)/ln(5000) - 2). The volume factor is an activity multiplier that down-weights thin trading when a liquidity rank is assembled.

Effective percent margin

Effective percent margin is posted margin dollars divided by the three-year dollar range of the contract, then multiplied by 100. It is posted margin expressed as a share of the contract's three-year dollar range, so capital lock-up is compared with the move being underwritten.

Posted percent margin and effective percent margin need not agree. The supplied table shows gold at 67.9 versus 157.6 on those two measures.

For listed shares, trading activity is framed as a liquidity proxy equal to period volume as a percentage of shares outstanding. Share turnover is equity volume for a period divided by shares outstanding, used as a stock-market proxy for trading liquidity.

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

21 of 51 in the Futures contract selection track

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