Let's examine the liquidity of equity index futures. The question we want to answer is whether liquidity in equity futures contracts with different expiry months is comparable. In other words, to contracts that expire relatively soon trade with as much liquidity as contracts that have an expiry further into the future. To answer this, let's have a look at the open interest and daily trading volume of two equity index futures contracts, and how these changed over time. We'll look at the September, 2023, which had a trading code of ESU23 and the December, 2023 ESZ23. We start our observations in May 23, at which time the June 23 future was the next expiring contract. This is also referred to as the front month contract as shown in the charts, open interests and daily trading volumes for both contracts were very low or close to zero in May 23. However, as we move closer to June the expiry month of the then front month contract, we observe a significant increase in both open interest and daily trading volume for the September contract. This increase reflects traders shifting their focus to the September contract as the next front month approaches. Open interest in the September contract then remains relatively steady over the following months, but as the September expiry approaches open interest in the September contract begins to decline rapidly while open interest in the December contract starts to rise. This pattern is also evident in the daily trading volumes with activity gradually shifting from September to December. Overall trading volume is less constant compared to open interest as it fluctuates day to day-to-day based on trading activity. However, volume often spikes during periods of transition as changes in open interest are frequently driven by increased trading volume, particularly around the role period.

The key takeaway is this, in equity index futures liquidity is highest in the front month contract, and it remains so until shortly before the contract expires. This concentration of liquidity in the front month is largely due to the fact that shorter dated contracts carry less exposure to interest rates as well as dividends and other costs of carry, making them more attractive to both short term traders and hedges.

As the front month expiry date nears, we typically see a transition of open interest and trading activity from the front month to the next contract. By the time the front month contract expires, almost all open interest has shifted to the following month's contracts. This concentration of liquidity in the front month ensures that market participants have the greatest ease of entry and exit, supporting efficient trading and hedging.

This means that very few contracts are actually held until settlement. Most positions are closed out before expiry. However, an investor holding a short position in the front month contract as a hedge for an equity portfolio, will lose that hedge as the contract approaches expiry. Unless they establish a new short position in the next contract. What investors typically do in such cases is to roll the contract. They close the existing position in the expiring contract and open the equivalent position in the contract that is set to become the next front month contract. As the current one expires. This practice of moving a position from one contract to the next prior to expiry is known as the future's role. Rolling the position allows investors to maintain continuous exposure without interruption.