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Contract Liquidity Rules? How low OI and Vol?


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Contract Liquidity Rules? How low OI and Vol?

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  #11 (permalink)
bdwg
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SMCJB, ok good, not my intention to rock the boat. I'm just looking for a rule of thumb to help me select some of the less liquid markets without getting in trouble when it comes time to go flat. I was hoping for replies along the lines of traders saying they have have started having liquidity problems around certain Vol/OI levels and therefor they don't trade anything if it falls below X levels. Thats all I'm looking for.

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  #12 (permalink)
 SMCJB 
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On something like a mini, which is not really the real product, I would have thought Volume was more important than OI. I'd be a lot more comfortable trading QM with 14k volume and 1.5K OI than I would be YI with similar 1.5k OI but only a couple of 100 lots a day of volume.

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  #13 (permalink)
 mattz   is a Vendor
 
 
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SMCJB View Post
That's an interesting point. Since the mini's don't trade tick for tick with full size the last trade could be an old print which when combined with a gap, means the next trade exceeds exchange max move criteria.

Correct. But, this scenario could happen on the most liquid of contracts as well. So it is always recommended to check your orders and verify that your orders were triggered, especially if they are stops.

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  #14 (permalink)
 bobwest 
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bdwg View Post
SMCJB, ok good, not my intention to rock the boat. I'm just looking for a rule of thumb to help me select some of the less liquid markets without getting in trouble when it comes time to go flat. I was hoping for replies along the lines of traders saying they have have started having liquidity problems around certain Vol/OI levels and therefor they don't trade anything if it falls below X levels. Thats all I'm looking for.

This is an interesting question, and I agree that you would think that the answer would be readily available.

Since I trade one of the most liquid and heavily-traded contracts around (ES), I have never had to think about this. (Which is one reason I trade it, of course.)

But my first impulse is to generally agree with @SMCJB: I would first look at the spread, which should be a tick, and then at the average volume, and then compare with other contracts. A big spread and/or low volume is not liquid, would be the thinking.

Open interest could be a factor I suppose, but I don't know exactly how it would figure in, because of the question of who holds that interest. What if the majority of open interest is held by traders that are content to just hold? Probably not much trading, so not much liquidity. But then, what if suddenly there is a big fundamental shift, say in some resource supply or something -- if all the big holders suddenly move in one direction, how liquid is that?

So there is the question of how much a contract is subject to sudden disruptions, and there is also the simple question of how much it typically moves, so some measure of volatility would need to come in as well.

Does this help the thread starter's question of how to "to help me select some of the less liquid markets without getting in trouble when it comes time to go flat?" My initial, and a little conservative, response is pretty much that, if you want high volatility from an illiquid market (which I assume is the point), then you will get illiquidity when you try to get out, too.

Probably there is some quantification of all the factors somewhere, but I would not be surprised if it came down to that. If it has been quantified, I expect that exploiting it would be difficult, as a lot of the players would know the models perfectly well, and they would be baked into the price.

Someone who is more familiar with these questions may want to pick up on this.

Bob.

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 paps 
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Liquidity is a very Big Subject. Am not sure you can decide on liquidity dry so well in advance...in terms of weeks. If you do...pls do pass on the info...will be great insight. Though I only trade NQ ES n CL....will be good to know what you find.

however on a very generic term....the affect of liquidity can be seen or the disappearance of it... on short term basis....Flash Crash/Brexit/Elections/etc etc. There are multitude ways of gauging this...if that something someone really wants. But i dont think anyone will give it away...except a generic statement>> see Depth of Market to guage. However again on a very broad based term.....Liquidity with/without the presence of Volatility is something which would affect liquidity.

Anyways....as said multitude of ways are there....i have seen a free one here.. & it goes to show what one can cook up. I have one very similar running for various markets simultaneously amongst other Volatility indicators.
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  #16 (permalink)
gaston289
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I had the same question and found a reference in the book 'a complete guide to the futures market': the author advises to avoid contracts with daily volume under 1,000 contracts and open interest under 5,000.

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