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2010issue C0293

A pre-trade liquidity screen for futures contracts

A relative futures liquidity score equalizes historically observed dollar opportunity across contracts, then ranks venues by open interest and a volume adjustment. Effective percent margin and activity marks are read with that ranking so posted capital and fill difficulty are visible before an order is chosen.

  • A relative futures liquidity score multiplies contract point value, a three-year maximum price move, open interest, and a volume adjustment, then ranks contracts by that product.
  • The equal-dollar contract count states how many contracts of one future must be traded to match the same historically observed dollar opportunity as another future, so one-lot comparisons are avoided.
  • Relative contract liquidity is that equal-dollar count times total open interest times a volume factor, read from easiest to transact at the top of the ranking to hardest at the bottom.
  • Effective percent margin and activity marks complete an implementation cost screen: capital lock-up can be compared across products, and names with one activity mark or none are weaker candidates for speculative execution.
Entries in this reading3 entries
Current trackCommission analysis37 readingsLiquidity filter118 readingsOpen interest analysis118 readings

How the liquidity score is formed

A relative futures liquidity score can be formed by multiplying contract point value, a historically observed maximum price move, open interest, and a volume adjustment, then ranking contracts by that product.

The maximum price excursion used in both the liquidity score and the equal-dollar contract count is taken from three years of historical contract data.

Equal-dollar contract count

The equal-dollar column states how many contracts of one future must be traded to match the same historically observed dollar opportunity as another future.

That count exists so one-lot comparisons across products are avoided.

Relative contract liquidity

Relative contract liquidity is the equal-dollar contract count times total open interest times a volume factor, read from easiest to transact at the top of the ranking to hardest at the bottom.

Open interest is the count of outstanding positions used as a size-of-market input when judging whether a ranked contract can absorb an order.

The volume factor is the larger of 1 and an exponential transform of volume against a 5,000-contract reference, which scales down thinly traded names while keeping a floor of 1. Active markets are left unpenalized, and names whose volume is weak relative to that activity threshold have their liquidity score shrunk.

Margin, activity, and the implementation cost screen

Effective percent margin is posted margin divided by the three-year dollar range of the contract and then scaled to a percent, so capital lock-up can be compared across products whose raw margin rates differ.

Contracts that receive one activity mark or none are classified as low-activity venues and therefore weaker candidates for speculative execution.

Reading margin, effective margin, and activity marks together makes posted capital and fill difficulty visible before an order is chosen.

An equity-side analogue

On the equity side, period volume divided by shares outstanding is used as a turnover-rate proxy for trading liquidity.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
8 of 32 in the Commission analysis track
201162-62 pp.Next on Commission analysisCurrency option venues, spreads, clearing, and premium costImplied volatility and option-premium analysis come first. They place a currency option in a market regime before the quote is treated as a working price.
All readings on this track · 32 readings
  1. 1985Matching ticket size to negotiable commission schedules
  2. 1985Minimum tickets can price a small book out of its own exit
  3. 1992Stop-order slippage as an execution cost filter
  4. 1993Cost-aware walk-forward evaluation of pattern-detector signals
  5. 2001Audit high-turnover operating conditions as one procedure
  6. 2002Front-load futures commission and slippage
  7. 2005Inactive account fees as hidden implementation cost
  8. 2010A pre-trade liquidity screen for futures contracts
  9. 2011Currency option venues, spreads, clearing, and premium cost
  10. 2012Filter futures contracts by liquidity and implementation cost
  11. 2012Futures commission versus one tick of cost
  12. 2012Ranking futures liquidity for executable orders
  13. 2013Filter option day trades by spread, volume, and fees
  14. 2013Filter futures by liquidity, open interest, and effective margin
  15. 2014Book futures data fees as implementation cost
  16. 2015Use a futures liquidity rank as a pre-trade checklist
  17. 2015Filter unexecutable futures by liquidity, open interest, and margin
  18. 2015Futures liquidity ranking as an execution filter
  19. 2015Filtering option trades by bid-ask width
  20. 2016Exchange quote fees as execution costs and liquidity filters
  21. 2016Filter futures by liquidity, open interest, and margin cost
  22. 2016Comparing dollar-index futures execution costs and liquidity
  23. 2016A futures liquidity ranking as a screen for executable orders
  24. 2017Filter a futures board by liquidity, open interest, and implementation cost
  25. 2017Filter futures contracts by liquidity and margin cost
  26. 2017How residency rules raise futures implementation costs
  27. 2018Screen listed futures by liquidity, open interest, and margin
  28. 2018Contract selection is the first filter on competing bitcoin futures
  29. 2018Filter futures execution by liquidity and margin
  30. 2018Commission analysis for brokerage execution costs
  31. 2019Ranking futures liquidity before you size the order
  32. 2020Brokerage selection as an implementation-cost problem
By fieldLiquidity and costs119 readingsBy year201075 readings
All 37 readings tagged Commission analysis
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2012Filter futures contracts by liquidity and implementation cost2012Ranking futures liquidity for executable orders2013Filter futures by liquidity, open interest, and effective margin2015Filter unexecutable futures by liquidity, open interest, and margin2015Use a futures liquidity rank as a pre-trade checklist