Skip to main content

How Does Physical Settlement Impact the Liquidity of a Futures Market?

Physical settlement can sometimes reduce the liquidity of a futures contract, particularly as it approaches expiration. Traders who do not want to deal with delivery tend to close out their positions before the delivery period begins, which concentrates trading volume into the front-month contract and reduces volume in the expiring contract.

This is less pronounced in highly liquid financial futures markets.

Explain the Difference between “Expiration” and “Settlement” in Derivatives
What Is the Concept of ‘Delivery Squeeze’ in Commodity Futures and Can It Apply to Crypto?
How Does the Lack of Physical Delivery Affect a Trader’s Tax Obligations?
What Is the ‘Delivery Period’ for Physically Settled Futures Contracts?