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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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  #1 (permalink)
bdwg
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I'm trying to decide on a rule of thumb for deciding if a contract isn't liquid enough to trade. I was thinking vol over 1k and open interest over 5k. What do you all think? How low can you go and still be able to get out of a contract? A lot of these mini contracts are intriguing, but I'm just not sure if the liquidity is there. Also, I'm not talking about short term trading, I'm thinking more like a few weeks to months. Thanks in advance!

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 SMCJB 
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With regards to the mini contracts many of the low volumes do not equate to low liquidity. For example if you watch QG (NatGas) or QM (Crude) you will see that the market in the first two months is almost always 1 tick wide. Just because its not trading tick by tick with NG and CL doesn't mean the liquidity isn't there.

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bdwg
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SMCJB View Post
With regards to the mini contracts many of the low volumes do not equate to low liquidity.

I don't doubt it, something like YI (mini silver) looks very active, but I haven't had the guts to start trading it because the OI is under 1000.

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bdwg
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Well this thread has flat lined..... I really thought that it would get some conversation going. I assumed most people trading futures had their liquidity rules in mind. oh well....

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bdwg View Post
Well this thread has flat lined..... I really thought that it would get some conversation going. I assumed most people trading futures had their liquidity rules in mind. oh well....

Most traders are concerned with liquidity and for the most part what I have seen is that people trade according to the liquidity they see in the market: indices, metals, energy, treasuries, etc.
They do not need to check the liquidity on that because it is reflected in their fills and execution.

The mini contracts are slightly less liquid but might still serve you well if you have a smaller account.
But, lack of liquidity may have its own issues. For example, I remember many years ago we had a situation where on the mini gold a stop was not triggered because of the price gap and the stop has been turned by the exchange to a limit because the price gap was too large(?).

Anyway, there is only so much you can discuss liquidity and sooner or later you will realize that the popular products are better, in my opinion, for execution if you are a short-term trader.

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 SMCJB 
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bdwg View Post
Well this thread has flat lined..... I really thought that it would get some conversation going. I assumed most people trading futures had their liquidity rules in mind. oh well....

I gave you what I believe to be a good answer regarding liquidity. You replied with a factual statement about OI unrelated to liquidity. I'm not sure what else to say.

And while you are right many people are concerned about liquidity, but most of them are trading full size contracts.

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 SMCJB 
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mattz View Post
For example, I remember many years ago we had a situation where on the mini gold a stop was not triggered because of the price gap and the stop has been turned by the exchange to a limit because the price gap was too large(?).

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.

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bdwg
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SMCJB View Post
You replied with a factual statement about OI unrelated to liquidity. I'm not sure what else to say.

Sorry, I appear to have ruffled your feathers. Do you really think open interest is unrelated to liquidity?

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 SMCJB 
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I don't want to appear that you've ruffled feathers (you haven't) I just don't know what else you expect someone to say. I just checked QM (which is the CME/NYMEX Crude Oil eMini) and it's OI last night was 1418 with Volume 13909. As I said earlier the bid-ask in QM is nearly always 1 tic wide, so yes it's very possible for a contract with only 1428 OI to have excellent liquidity. I don't trade YI so can not speak to its liquidity.

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