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Benefits of Futures: Liquidity

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Liquidity is perhaps one of the most important elements in gauging opportunities in a market, but what do we really mean when we refer to liquidity, and how do futures markets compare to securities markets in terms of liquidity?

At its core, liquidity is the collective expression of traders’ opinions on the market. Like any other market, these opinions are represented in a futures market either as existing positions held by traders, known in futures as open interest, or as buy or sell orders communicated to the rest of the market but yet to be executed.

The size and price of these orders may vary considerably but the key element to consider is that the more opinions that are expressed in the market, the more liquid the market is.

 Why is liquidity such an important element of market opportunity? The reason is that the more participants there are, the more expressions of opinion on the market, the greater the likelihood that a single trader like yourself will encounter another with an opposing viewpoint that results in you both agreeing on a quantity and price to trade. Take for example CME group’s natural gas futures market compared to the US natural gas ETF market. One natural gas contract is equivalent to ten thousand million BTU of natural gas exposure at a price

of $2 seventy two and two-tenths cents. The notional or dollar value of a single contract is twenty seven thousand two hundred twenty dollars at an average daily volume of three hundred twenty two thousand 4 contracts as a fourth quarter 2014 the dollar value total of natural gas futures traded between participants on an average day is just shy of eight point eight billion dollars.

The UNG ETF contract, which tracks the price of natural gas, trades at $13 94 cents per share..UNG reports an average daily volume of twelve million five hundred eighty two thousand three hundred shares, making the average notional value traded within the market of only about one hundred seventy five million dollars per day. Understanding liquidity in a market is a critical consideration for traders before jumping into a trade. Futures markets offer deep liquid markets that let traders express their opinions in a tremendously efficient way.

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