The traditional Friday afternoon mindset on commodity trading desks is undergoing a significant shift. For the first four days of the week, traders focus on maximizing profits, but by Friday lunchtime, their attention turns to risk management, as they prepare for the weekend when markets are closed. This period of market inactivity can be particularly challenging, as unexpected global events can occur, leaving traders unable to adjust their positions until Sunday evening. 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, given the inability to rebalance or adjust bets during this time.
However, a recent development in the oil options market has disrupted this long-standing routine. As tensions between Iran and Israel escalated, oil-linked futures experienced a sudden spike in volume over a weekend in March.
Traders flocked to crypto exchanges, where they traded 'perpetual futures,' which are contracts that run 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 trading volume is still smaller than weekday volume, it is no longer negligible. This shift has significant implications for the oil market, particularly in terms of how traders price short-dated West Texas Intermediate (WTI) crude options. Researchers at Energy Aspects note that the rapid growth of perpetual contracts on crypto exchanges is changing the dynamics of implied volatility for WTI contracts. The traditional 'weekend effect,' where implied volatility falls on Fridays due to traders' reluctance to hold positions over the weekend, is beginning to narrow.
With the availability of perpetual contracts, traders can now hedge their exposure over the weekend, which may lead to increased demand for options and a reduction in the Friday selling pressure. However, institutional traders are still cautious about embracing perpetual contracts, citing lack of liquidity and infrastructure as major concerns.
The volume of perps linked to traditional assets is still relatively small compared to traditional exchanges, and large institutions require a different structure to support 24/7 trading. Nevertheless, the emergence of perpetual contracts is influencing traditional markets, providing an additional source of price discovery and allowing traders to gauge market direction over the weekend. As the crypto industry continues to innovate, it may be one of the first instances where traditional finance is influenced by crypto developments.
Whether perpetual contracts can reshape the traditional market remains uncertain, but there are signs that old habits are already changing for traders, and the assumption that Friday's closing bell marks the beginning of a two-day waiting period may no longer hold.