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How Does Liquidity Impact the Futures Markets?

January 25, 2021 by Daniels Trading| Futures 101

Futures market liquidity is an important topic that’s easy to overlook. However, if you’re going to prosper as an active trader, then understanding the concepts of market depth and order flow is critical. Let’s take a closer look at the leading factors that affect futures liquidity.

Deep vs. Thin Markets

In general, liquidity is a measurement of how easy it is to exchange one type of asset for another. As it pertains to the futures markets, liquidity reflects the efficiency by which contracts are bought and sold.

In practice, futures market liquidity is a product of the ongoing dialogue between buyers and sellers. As market participants send orders to the market, the ability for a given contract to change hands quickly at a stable price is impacted. Subsequently, markets come in two basic varieties: deep and thin. Here’s a quick look at each type.

Deep

A deep futures market features heavy participation, consistent order flow, and no shortage of buyers and sellers. These elements promote trade-related efficiency and constant pricing volatility. As a general rule, deep markets are related to assets in the public eye.

Thin

Thin futures markets are those that experience lagging participation and limited order flow. These contracts are a challenge to trade due to choppy price action and wide bid-ask spreads. Slippage is a major concern in thin markets because entering and exiting trades efficiently can be a formidable challenge.

Various economic events can impact the market, from supply and demand to commodity consumption. Take the Learn About Key Economic Events CME Group Course now >>>


Deep, active markets are target-rich environments for active traders. When a contract is being frequently bought and sold, trade-related efficiencies and periodic volatilities are enhanced. As a result, positive expectation trading opportunities become more common because the negative influences of slippage and sudden volatility are minimized.

Addressing Futures Market Liquidity

For many active traders, finding liquid markets is job No. 1. Fortunately, this task may be routinely accomplished by simply looking at several indicators:

Traded Volumes

Average traded volumes represent the number of contracts that have changed hands in a market over a given period of time. For instance, the E-mini S&P 500 regularly trades more than 1 million contracts in a given day.

Open Interest

Futures market open interest is the total number of contracts held by market participants at the end of a trading day. From a practical standpoint, the greater the open interest, the greater the forthcoming market liquidity.

Trading Ranges

A contract’s periodic pricing fluctuations can be a signal of market liquidity. If order flow remains heavy, then an intraday, day, or weekly trading range is more likely to become extended. Although this phenomenon can occur in thin markets, it typically develops in those experiencing robust participation.

Large traded volumes, open interest, and extended trading ranges are signs that a market is liquid. Here are a few of the most consistently liquid contracts offered by the Chicago Mercantile Exchange (CME):

Asset Class Liquid Contracts
Agriculture Corn (ZC), Soybeans (ZS), Wheat (ZW, KE)
Metals Gold (GC), Copper (HG)
Energies WTI Crude Oil (CL), Henry Hub Natural Gas (NG)
Equities E-mini S&P 500 (ES), E-mini NASDAQ (NQ)
Currencies Euro FX (6E), Japanese yen FX (6J)

It is important to remember that the futures products with the highest liquidity are known as “front-month contracts.” A front-month contract is one that is close to expiration. When compared to “back-month” or “far-month” contracts, market depth, liquidity, and public interest are typically greater.

For instance, the E-mini S&P 500 is listed for trade quarterly, with the contract months of March, June, September, and December. Accordingly, the nearest month to the present represents the front-month contract and greatest futures market liquidity. This listing will be more liquid than back-month issues, which will likely feature reduced market depth and order flow.

Interested in Becoming a Technical Trader?

If you’re interested in becoming a market technician, a great place to begin your journey is with Daniels Trading’s online trading guide Technical Analysis for Beginners. In it, you’ll find indispensable futures market liquidity basics, as well as tips for reading quotes and contract specifications. Don’t wait―download your complimentary copy today!

Online Course: Learn About Key Economic Events

Filed Under: Futures 101

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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