Volume is a good measure, because income of brokers, market makers and exchanges depends on volume. But then there can be extrem distortions, if there are small contract sizes. The Option Market would then be lead by KOPSI options, because the low contract value leads to high trading volumes.
Contract Size (contract point value * points quoted)
A better measure for liquidity would be Traded Value = Volume * Contract size. With this criterion the large ES contract with a point value of 250 has 5 times the weight compared to the E-Mini with a point value of 50. If you just take volume 1 contract traded of the large ES equals 1 contract of the E-Mini, which does not make sense.
Volatility ( maximum price move over a period)
As a trader you do not only want to hold a large position, but to make money - or to lose money - you need volatility. If you define the maximum price move in a specified period as a measure for volatility, then this will impact liquidity. This criterion certainly exceeds the standard definition for liquidity, but is useful for a trader in practical terms. Do you really want to trade EuroDollar Futures - you will fall asleep before you can close your position - or do you prefer to CL with its high volatility. If you take into account volatility, this shifts the focus from liquidity to trading opportunities.
Open Interest (# contracts open)
A measure of depth, how many contracts are currently being held by traders.
To include all four elements you can use the product
Contract volume * Contract Size * Maximum Price Move * Open Interest
as a measure for opportunity or liquidity for a contract. The last two points are optional, but to exclude value and simply count the volume (# contracts traded) does not make sense.
Last edited by Fat Tails; September 28th, 2010 at 05:19 PM.
The following 3 users say Thank You to Fat Tails for this post:
I once heard Dan Gramza say that the KOSPI (Korea Composite Stock Price Index) futures was the most liquid futures instrument of all. I haven't been able to confirm that, but I don't know why he would lie about that either. Anybody ever looked at the KOSPI?
Today's trading volume of the Kospi 200 Dec futures was 173,412 contracts with a contract value of Won 500,000. The trading volume of ESZ0 was 1,992,089 contracts with a contract value of USD 50. FESX traded 1,500,712 contracts with a contract value of € 10.
If you calculate the value of today's traded volume, you get
I have considered implicitly the price moviment infact I mentioned FGBL FESX and FGBL and not Euribor, cos here we generally speak about day trading, otherwise why not considering trading EuroDollar or Euribor? Think are the better instruments for spread trading.
I would like to include in the choise of instruments to trade the orders filling, this in relation also to trading style, cos if u get ES that is one the most liquid instrument (see your prev post) and put a limit order u will wait a lot before it is filled, if u consider 6E or CL the order filling will be really more faster.
Take your Pips, go out and Live.
The following user says Thank You to LukeGeniol for this post:
Great statistical information in all your threads. I was hoping to get a little insight and build an excel file with the current instruments i look at and the necessary information/data i need to come up with information such as:
Maximum Price Move at a given timw ( what are the times price moves moves most for the given instrument)