2012issue C1173

Ranking futures liquidity before choosing a contract

A historical workflow forms a relative futures-liquidity rank from contract point value, three-year price motion, open interest, and a volume factor usually between 1 and 4. Equal-dollar contract count and effective percent margin sit beside that rank when a listed futures contract is chosen.

A liquidity filter ranks whether a futures contract is executable from order-book activity, open interest, recent range, and margin cost over the life of the order.
Relative contract liquidity multiplies equal-dollar contract count, total open interest, and a volume factor so names can be ordered by how easily their full book can be traded.
Equal-dollar contract count scales each market to the same three-year dollar-range potential, while effective percent margin compares capital locked against that range.
Period-to-period rank changes are attributed to compressed recent volatility, activity falling below one-hundredth of earlier levels, or simultaneous shifts in popularity and volatility.

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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 ranks whether a futures contract is executable from order-book activity, open interest, recent range, and margin cost over the life of the order.

Open-interest analysis uses outstanding contract inventory, together with volume, as a capacity input when judging how readily size can be transacted.

Futures contract selection chooses among listed futures by comparing liquidity, equal-dollar contract count, and margin efficiency rather than by directional thesis alone.

Equal-dollar contract count

An equal-dollar contract count is obtained by multiplying the contract's dollar tick value by the largest price change observed over the prior three years, so every market in that column is scaled to the same dollar-range potential.

Three-year price motion is that largest price change. It is used both to equalize dollar-profit potential and to scale the liquidity product.

Equal-dollar futures lots in liquidity order

A one-lot in the full S&P 500 or silver matches the same three-year dollar excursion as 23 Eurodollar contracts or 28 five-year BOBL contracts. High relative-liquidity rank therefore does not mean a small implementation size. Counts are the November 2012 Trading Liquidity: Futures table values, shown in that table’s descending liquidity order.Listed commodity and financial futures · November 2012

The source sets the count as tick dollar value times the three-year maximum price excursion, so every bar is scaled to the same dollar profit potential. The attached floor photograph carries no series; these figures come from the printed table.

Volume factor and activity marks

The volume factor is a multiplier, typically from 1 to 4 for thin or heavy activity, and formally the greater of 1 or an exponential transform of volume versus a 5,000-contract reference.

In the historical workflow that transform is the greater of 1 or the exponential of the natural log of volume divided by the natural log of 5000, minus 2.

Contracts marked with one activity dot or none are classified as showing little activity relative to names with the densest marks.

How relative contract liquidity is formed

A relative futures-liquidity rank is formed by multiplying contract point value, a three-year historical maximum price motion, open interest, and a volume-related factor that is usually between 1 and 4 depending on how thin or heavy activity is.

Relative contract liquidity equals that equal-dollar contract count times total open interest times the volume factor, so names can be ordered by how easily their full book can be traded.

Effective percent margin

Effective percent margin equals dollar margin divided by the three-year range of the contract's dollar value, then multiplied by 100.

The figure lets capital locked against that range be compared across markets, so margin cost can sit beside the liquidity rank when a contract is chosen.

Why ranks change from period to period

Period-to-period rank changes are attributed to compressed recent volatility, especially in interest-rate-linked futures, to activity falling below one-hundredth of earlier levels, or to simultaneous shifts in popularity and volatility.

Share-market liquidity is treated as a turnover rate: volume over a given period expressed as a percentage of shares outstanding.

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

15 of 51 in the Futures contract selection track

201337-37 pp.Next on Futures contract selectionLiquidity-first futures contract selectionA liquidity filter uses volume, open interest, spreads, and implementation cost over the life of an order to decide whether a listed contract is executable.

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