Ranking futures liquidity for executable contract choice

What the rank combines

A relative liquidity rank for listed futures can be built by combining a scaled contract count, total open interest, and a volume factor. Relative contract liquidity is then shown as more or fewer marks so markets can be compared for ease of trading.

Open interest is the stock of outstanding futures positions. Used together with volume, it is used to judge how much size the market can absorb. The volume factor in that rank is the greater of 1 and the exponential of natural-log volume minus 2, with volume measured in units of 5000.

Scale every market to the same dollar range

Contracts needed for an equal dollar range equal tick dollar value times the three-year maximum price excursion, so every market in that column is scaled to the same dollar value. That figure is the contracts to trade for equal dollar profit count. Each listed count therefore represents the same dollar exposure.

Compare margin on the same lookback

Effective percent margin is margin dollars divided by the three-year dollar range of the contract, then multiplied by 100. Margin use can then be compared on the same lookback used to scale the contracts.

Use the marks as a liquidity filter

Markets at the top of the relative-liquidity column are described as easier to buy and sell. Markets at the bottom are described as the most difficult. Contracts shown with one mark or none are treated as low-activity markets and therefore less suitable when the goal is executable size.

A liquidity filter keeps contracts with dense activity marks and drops thin markets before a trade is sized.

What the July 2010 ranking showed

In the July 2010 ranking, short-rate contracts such as three-month Euribor and Eurodollar sit at the top of the liquidity marks, while many agricultural, metal, and currency contracts sit near the bottom.

Editorial reading of the workflow

Editorial. TradersWeek reads this archive workflow as a construction problem for the futures shortlist, not as a claim about returns. First apply the liquidity filter so only markets that can actually be entered and exited remain. Then size with the contracts to trade for equal dollar profit count so a comparable dollar move is comparable. Then check how much effective percent margin that choice consumes against the same three-year range.

Futures contract selection, in this editorial reading, is the last step. It is the choice of which listed contract to trade after liquidity rank, scaled contract count, and margin efficiency have been compared across markets.