What is a better measure of liquidity in futures contracts - average daily trade volume or open interest and why?
Volume is better than OI. Volume is # of transactions and OI is simply ppl. that are willing to hold past the day's session. Edit- It depends on whether you day trade like me, or position trade. For me OI has no real value that I have seen.
1) Volume matters more than open interest. 2) Ideally, the open interest is many times larger than average daily volume so that the market doesn't rely too much on daytraders for activity. Longer-term investors can "stabilize" the market at extremes and create stronger trends "in the middle".