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2019issue C0260

Ranking futures liquidity before you size the order

A reject-first execution habit treats a cross-market futures liquidity board as a gate on whether an idea is implementable. Names that survive are then compared on open-interest depth and how much capital a like-for-like dollar excursion would lock up.

  • Use a liquidity filter first. Activity marks of one or none flag little activity and a weaker candidate for speculative execution.
  • Relative contract liquidity multiplies the equal-dollar contract count by open interest and a volume adjustment factor, then sorts names from easiest to hardest to buy and sell.
  • Pair percent margin with effective percent margin so capital lock-up can be compared among contracts that already clear the liquidity gate.
  • Listed shares use a share turnover proxy, period volume as a percentage of shares outstanding, which is distinct from the futures open-interest construction.
Entries in this reading3 entries
Current trackCommission analysis37 readingsLiquidity filter118 readingsOpen interest analysis118 readings

Treat the board as a gate

A futures liquidity ranking can be built by multiplying contract point value, a three-year maximum price excursion, open interest, and a volume factor usually scaled from 1 to 4.

Editorial interpretation: treat that cross-market board as a reject-first gate. The first question is whether an idea is implementable, not which name looks most interesting.

Read activity marks first

Activity marks on the rank list stand in for relative ease of transacting. One mark or none flags little activity and a weaker candidate for speculative execution.

The liquidity filter is the pre-trade screen that keeps only contracts with enough activity and depth to enter and exit intended size.

Put size on one dollar scale

An equal-dollar size column states how many contracts of each market match the same three-year dollar excursion, so those counts share one dollar scale. That equal-dollar contract count is how many contracts of one market match another market's three-year dollar price excursion.

Open-interest weight is total outstanding contracts used as a depth input so a wide-range but thinly held market does not rank as executable.

Contracts needed for equal dollar profit

After the liquidity gate, names that still look tradeable are compared on how many contracts it takes to lock the same three-year dollar excursion. Equity index minis and T-bonds sit at two to three contracts; grains, pesos and eurodollars need far more size. Counts come from the February 2019 Trading Liquidity: Futures table, not from the photograph of the pit.
After the liquidity gate, names that still look tradeable are compared on how many contracts it takes to lock the same three-year dollar excursion. Equity index minis and T-bonds sit at two to three contracts; grains, pesos and eurodollars need far more size. Counts come from the February 2019 Trading Liquidity: Futures table, not from the photograph of the pit.Cross-market futures (Feb 2019 liquidity board) · Front-month contracts as of February 2019 · 2016-01-01T00:00:00.000Z to 2019-12-31T00:00:00.000Z

Contracts to Trade equals tick dollar value times the three-year maximum price excursion, so every name is scaled to the same dollar profit. Relative-liquidity dots are a separate ranking and are not plotted here.

Rank what remains

Relative contract liquidity is the equal-dollar contract count times total open interest times a volume factor, then sorted from easiest to hardest to buy and sell.

The volume adjustment factor is a multiplier, typically from one to four, that lifts active tape and floors quiet names. One stated form is the greater of 1 and exp(ln(volume)/ln(5000) - 2), which reduces the rank of contracts with light trading activity.

Compare capital after the gate

Effective percent margin is posted margin dollars divided by the three-year dollar range of the contract, then multiplied by one hundred, so capital lock-up can be compared across names.

Posted percent margin and effective percent margin are paired so capital commitment can be compared when choosing among otherwise executable contracts.

Editorial interpretation: among names that already survive the liquidity filter, use that pair to see how much capital a like-for-like dollar excursion would lock up.

Keep listed shares on a different measure

For listed shares, period volume as a percentage of shares outstanding is treated as a turnover-rate proxy for trading liquidity, distinct from the futures open-interest construction.

Editorial interpretation: do not fold that share turnover proxy into the futures rank.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
31 of 32 in the Commission analysis track
202059-59 pp.Next on Commission analysisBrokerage selection as an implementation-cost problemA usable brokerage must first handle the intended instrument, then offer full-service-brokerage, discount-brokerage, or both.
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
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