Avoiding Futures Expiration Volume Distortions
Summary
The document discusses how to handle unusual futures volume near contract expiration when volume is used as a trading signal. The responses recommend excluding the affected contract from the sample once it becomes too close to expiration, since rolling activity can distort volume independently of the market behavior the signal is intended to measure. One suggested practice is to set a trading window relative to first notice or last trade date and reduce exposure to zero when the contract enters that window. The exact timing is described as something to establish through research.
Another approach is to roll based on relative contract volume, moving positions to the more active contract as liquidity shifts. The document notes that liquidity often declines near expiration and mentions avoiding trading the expiring contract shortly beforehand. It cautions against relying on ARIMA as a general volume forecasting solution, while offering no comparative tests or specific window lengths. Practices may vary by asset and contract cycle, so the discussion provides general guidance rather than a universal rule.
Key ideas
- Expiration-related trading can create volume spikes that do not reflect the market process a signal is meant to capture.
- Set contract exclusion windows relative to first notice or last trade dates.
- Rolling positions into a later contract ahead of expiration can avoid distorted observations.
- Volume-based rolling is one way to identify when liquidity has shifted to the next contract.
- The appropriate exclusion window requires research and may vary across markets.
Tags
Full text
# How to handle the volume spikes near expiration for futures contracts? # How to handle the volume spikes near expiration for futures contracts? Are there any common practices to handle the volume spikes that occur near expiration of a futures contract? I intend to use volume of futures contracts as a predictor. However, due to the rolling activity near the expiration, there are spikes around expiration. These tend to be asset specific (quarterly contracts, monthly contracts etc.). While time series techniques like: - ARIMA for seasonality - FFT transform do sound promising, have been impractical in my experience. Are there any common techniques used around for this ? ## Answer by ThatDataGuy (score 1) https://quant.stackexchange.com/a/54220 I worked for a major systematic trading hedge fund. We traded futures extensively. We would set specific windows of time relative to either first notice date or last trade date where we would avoid trading contracts. Ie, we would reduce our position to zero when the contract got too short. Exactly what those windows were was obviously a research topic. If your strategy intends to use trade volume as a signal, but the volume around expiration is not the market process you are looking to sample, then don't sample it. Roll your positions forward to further contracts ahead of time. ## Answer by Hao Zhang (score 1) https://quant.stackexchange.com/a/54234 As other answers say you normally don't. You avoid trading it normally a couple of days before expire and you tend to find liquidity dries up on the day of expiring. Volume-based roll is a common way to know when to roll. ARMIA assumes some regression to the mean and normally isn't used to predict volume. Links: https://www.sierrachart.com/index.php?page=doc/ContinuousFuturesContractCharts.html#ContinuousFuturesContractVolumeBasedRollover https://adamhgrimes.com/how-to-calculate-futures-rolls/
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.