The popularity of perpetual futures in the crypto market has been evident for years, especially among investors outside the US. Now, with their introduction into regulated American markets, Wall Street is weighing the potential of these contracts as a lasting phenomenon or a fleeting retail trend. Notable trading volume has been observed, with Kalshi's perpetual futures exceeding $1 billion within a week of launch in June, prompting the exchange to seek regulatory approval for contracts tied to gold and silver.
Perpetual futures, often referred to as 'perps,' differ from standard futures contracts in that they do not expire, eliminating the need for traders to close or roll positions into new contracts. Instead, periodic funding payments maintain the contract's price close to the underlying asset. Estimated by Bank of America to have an annual volume of around $90 trillion, perpetual futures have become integral to global crypto trading. Following the Commodity Futures Trading Commission's (CFTC) clearance for Kalshi and Coinbase to offer regulated perpetual futures in the US, interest in these products is growing within Wall Street.
However, this interest does not translate to immediate adoption by large financial institutions, which are instead taking a cautious approach due to stricter capital rules, client obligations, and reputational risk. Proprietary trading firms, market makers, and newer clearing firms are more likely to be the first movers, as they have the freedom to test new venues and accept operational risk. The potential applications of perpetual futures extend beyond speculation, as they could help traders manage weekend risk by providing a liquid 24-hour market for hedging and price discovery. Despite the demand, the lack of depth in the market and regulatory uncertainties pose significant challenges.
A regulatory fight is unfolding, with questions surrounding the classification of perpetual contracts as futures or swaps, affecting margin rules and registration duties. The debate is also becoming increasingly competitive, with incumbent exchanges like CME challenging the CFTC's treatment of certain perpetual contracts.
As the market continues to evolve, Wall Street's view remains cautious, with trading firms, regulators, and exchanges each having their own perspectives on the potential of perpetual futures.