Is the liquidity of a warrant dependant solely on the turnover of the warrant?
Should you buy the warrant simply because it has the highest volume?

Most warrant issuers appoint Designated Market Makers ("DMMs") to make continuous buying and selling quotes in their warrants. Accordingly, the volume or number of warrants offered for sale or to be bought will generally be based on the number of underlying shares available for buying and selling on the market at that time.

Let's use an example to see how this works. If an issuer has two similar warrants over Stock ABC, all things being equal, the bid and offer quotations for these two warrants should be roughly the same and should be related to the volume present in the underlying share (Stock ABC). The fact that one warrant has actually traded, say, 1 million units a day for the past month and the other warrant has not traded at all does not effect this relationship. Therefore, we can see that the liquidity of a warrant is actually dependant on the liquidity in the underlying share.

An investor looking to buy a warrant over a particular share should consider a number of factors including their view on the future performance of the underlying share, the expiry date of the warrant, its exercise price and other relevant factors. A warrant's actual turnover in the market should not dominate the decision. The moral of this story is: don’t just simply buy the warrant with the highest volume as it may not be the right warrant for you!

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