The popularity of perpetual futures in the crypto space has been undeniable, with trading volumes reaching staggering heights. Now, as these contracts make their way into regulated American markets, Wall Street is grappling with the implications. The numbers are impressive, with Kalshi's perpetual futures reaching $1 billion in trading volume within a week of launch. This has led to the company seeking regulatory approval to expand its offerings to include gold and silver contracts.
Perpetual futures, also known as 'perps', differ from traditional futures contracts in that they do not expire, eliminating the need for traders to close or roll over positions. Instead, periodic funding payments help maintain the contract's price in relation to the underlying asset.
This product has become a cornerstone of global crypto trading, with Bank of America estimating annual perpetual futures volume to be around $90 trillion. Following the Commodity Futures Trading Commission's (CFTC) approval, Kalshi and Coinbase have been cleared to offer regulated perpetual futures in the US.
However, inside Wall Street, interest in perps does not necessarily translate to immediate adoption. While discussions about perps are becoming more frequent, large financial institutions are adopting a wait-and-see approach, preferring to study the products rather than launching them. Proprietary trading firms, market makers, and newer clearing firms are more likely to be the first movers, as they have more freedom to test new venues and accept operational risks.
The difference in approach between large banks and smaller firms is significant, with the former facing stricter capital rules, client obligations, and reputational risks. The potential use cases for perps extend beyond speculation, as they could help traders manage weekend risk by providing a liquid 24-hour market.
This could enable firms to adjust positions in response to events and use weekend prices to estimate where traditional futures may reopen. However, the demand for perps needs to be substantial to justify the commitment of capital.
The current issue is depth, with institutions facing challenges in moving large positions without shifting the market, and collateral systems not always keeping pace with the markets they support. A regulatory battle is also unfolding, with questions around whether some perpetual contracts should be treated as futures or swaps, affecting margin rules, registration duties, and liquidity provision.
The debate is becoming increasingly competitive, with incumbent exchanges protecting their existing businesses. For now, Wall Street's view on perps is cautious, with trading firms, regulators, and exchanges all weighing the opportunities and challenges presented by this $90 trillion crypto trading product.