For years, perpetual futures have been a staple in the crypto trading world, particularly among investors outside the US. Now, with their entry into regulated American markets, Wall Street is weighing whether they are a fleeting retail fad or a lasting threat to traditional futures.
The initial numbers are noteworthy, with Kalshi's perpetual futures reaching $1 billion in trading volume within a week of launch in June. This milestone has prompted the exchange to seek regulatory approval for perpetual futures tied to gold and silver, hinting that the product may not be limited to bitcoin and other digital assets. Perpetual futures, or 'perps,' are similar to standard futures contracts but lack an expiration date. Traders are not required to close or roll over their positions into new contracts monthly or quarterly, as periodic funding payments maintain the contract's price in line with the underlying asset.
This product has become integral to global crypto trading, with Bank of America estimating annual perpetual futures volume at approximately $90 trillion. Following the Commodity Futures Trading Commission's (CFTC) clearance for Kalshi to offer these contracts on May 29, Coinbase also received approval to list regulated perpetual futures in the US. However, within Wall Street, interest does not necessarily translate to immediate adoption. Discussions about perps are becoming more frequent, partly due to US regulators allowing offshore markets to transition onshore.
Nonetheless, most large financial institutions are still in the process of studying these products rather than preparing for significant launches. The first movers are likely to be proprietary trading firms, market makers, and newer clearing firms, which have more freedom to test new venues and accept operational risks due to their ability to trade their own capital. In contrast, big banks face stricter capital rules, client obligations, and reputational risks, making them more cautious. The potential applications of perps extend beyond speculation, as they could help traders manage weekend risks.
Traditional futures markets are closed for part of the weekend, even though significant events like wars, elections, and policy decisions can occur during this time. A liquid 24-hour perpetual market could enable firms to adjust their positions in response to events and use weekend prices to estimate where CME futures may reopen, making perps useful for both hedging and price discovery. However, insiders note that the demand must be present for firms to commit capital, and the current issue is depth, with contracts trading around the clock but institutions facing challenges in moving large positions without impacting the market. Weekend liquidity remains thin, and collateral systems do not always move as quickly as the markets they support.
A regulatory battle is also emerging, with questions about whether some perpetual contracts should be treated as futures or swaps, affecting margin rules, registration duties, and liquidity provision. Industry insiders believe these legal questions may gain importance as exchanges expand perps into commodities, equities, and other traditional markets. The debate has a competitive aspect, with CME challenging the CFTC's treatment of Kalshi's bitcoin perpetuals and arguing for different regulation.
Similar disputes may arise if exchanges seek to expand perps into equities and other asset classes. For now, Wall Street's stance is cautious rather than hostile, with trading firms understanding the product, regulators seeing a market moving onshore, and exchanges viewing an opportunity to capture new volume. Nevertheless, the largest banks are unlikely to take the lead, instead waiting for the rules, liquidity, and infrastructure to mature.