As the week draws to a close, the atmosphere on commodity trading desks undergoes a significant shift. For the first four days, traders focus on making profitable trades, but by Friday lunchtime, their attention turns to managing risk until markets reopen on Sunday evening. The reason for this shift is that anything can happen over the weekend - news of a new war, an election result, an unexpected announcement, or a market-moving social media post - and traders are unable to adjust their positions until trading resumes.
According to Mustafa Al Niama, former head of digital assets at Goldman Sachs, 'From about lunchtime, the desk basically stops thinking about making money and starts thinking about what they can live with for roughly forty-eight hours until the Sunday evening reopen.' This ritual is familiar to every commodities options trader, who must assess whether they are comfortable holding their position over the weekend, as they cannot adjust or rebalance their bets during this time. However, a recent development has disrupted this long-standing routine.
In March, the oil options market experienced an unusual spike in volume over the weekend, as traders flocked to crypto exchanges to trade 'perpetual futures,' which operate around the clock. The total value of active contracts on the decentralized exchange Hyperliquid reached a record $1.2 billion on March 8, a Sunday when traditional commodity markets were closed. While weekend volume is still smaller than on weekdays, it is no longer negligible, and it highlights the emergence of a 24/7 venue for oil derivatives trading, which is not available in traditional finance.
Researchers at Energy Aspects believe that the growth of perpetual contracts on crypto exchanges will change the dynamics of how traders price short-dated West Texas Intermediate crude options. For years, the implied volatility of WTI contracts has fallen on Fridays, as traders are reluctant to pay for protection through options or derivatives that they cannot actively manage while markets are shut. However, with the availability of perpetual contracts, traders can now hedge their exposure over the weekend, which may lead to a reduction in the 'weekend effect' in short-dated WTI options.
The ability to hedge over the weekend may also create new opportunities for traders, as they can capture profits if the market becomes chaotic, rather than simply holding their positions. However, finding a counterparty to take the other side of the trade remains a significant challenge, and the lack of meaningful liquidity is a major reason why institutional traders are still hesitant to enter the market. The volume of perpetual contracts linked to traditional assets has increased, but it is still relatively small compared to traditional exchanges.
For example, in March and April, the average volume of crude oil perps accounted for only about 2% and 4%, respectively, of the primary futures contract equivalents traded on traditional exchanges. While the numbers are impressive for crypto, they are still modest from Wall Street's perspective. The biggest challenge in adopting perpetual contracts is not the lack of trading volume, but rather the need for a different infrastructure to support 24/7 trading. Large institutions, such as banks, already have systems in place for traditional market hours, but they would need to adapt their systems to accommodate weekend trading.
The existing financial infrastructure, including clearing and settlement systems, is not designed to operate around the clock, making it difficult for institutions to participate in weekend trading. As a result, perpetual contracts remain the domain of crypto-native firms, proprietary trading shops, and savvy retail traders. However, there are signs that old habits are beginning to change, and some traders are already using perpetual contracts to gauge the direction of the market before traditional markets reopen. The emergence of perpetual contracts may be influencing how some traders behave, and it could potentially reshape the traditional market.
Whether perpetual contracts can actually change the traditional market remains uncertain, but there are indications that they are starting to have an impact. As CME's Duffy said, 'I think that markets will be 24/7 down the road. All markets.'