The Chicago Mercantile Exchange attempted to increase liquidity in the lumber futures arena by replacing the random-length lumber contract with a physical contract. The new lumber futures offer smaller contracts with more flexible delivery specifications. However, volume and open interest have not increased significantly. Open interest is the total number of open long and short positions in a futures market. Lumber futures’ low liquidity does not support hedging and speculative activity and causes high price volatility. During rallies, low participation causes offers to sell to disappear, and when the price moves lower, bids to purchase lumber tend to evaporate. Therefore, lumber futures can rise or fall to prices that defy logical, reasonable, and rational levels.
In a December 22 Barchart article on lumber, I wrote:
