By Friday afternoons, the atmosphere on commodity trading desks undergoes a significant shift. For the first four days of the week, traders focus on maximizing their profits. However, as the weekend approaches, their attention turns to managing risk.
The inability to react to market developments during this period can be a major concern, given the potential for unexpected events such as wars, election outcomes, or surprise announcements. According to Mustafa Al Niama, former head of digital assets at Goldman Sachs, the trading desk's primary concern from Friday lunchtime onwards is determining the level of risk they can tolerate over the weekend. Every commodities options trader is familiar with this ritual, where the focus shifts from anticipating market movements to assessing their comfort level with their current positions.
Terry Duffy, chairman and CEO of CME Group, notes that risk is not bound by traditional working hours. The oil options market experienced an unusual phenomenon earlier this year, which disrupted this long-established routine.
As tensions escalated between Iran and Israel, traders flocked to crypto exchanges to trade perpetual futures contracts, also known as 'perpetual futures,' which operate around the clock. This shift has significant implications for the oil market, particularly in the pricing of short-dated West Texas Intermediate crude options.
Researchers at Energy Aspects suggest that the growth of perpetual futures on crypto exchanges is altering the dynamics of implied volatility for WTI 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. While the volume of weekend trading is still smaller than on weekdays, it is no longer negligible.
The emergence of 24/7 trading venues is quietly influencing the oil market, with traders now having more opportunities to manage their risk. However, institutional traders are still hesitant to engage in perpetual futures trading due to concerns about liquidity and infrastructure. The lack of meaningful liquidity is a significant barrier, and the volume of perps linked to traditional assets is still relatively small compared to traditional exchanges.
Large institutions require a different structure to support 24/7 trading, and the existing infrastructure is not yet equipped to handle the demands of continuous trading. The biggest challenge may not be keeping the markets open, but rather ensuring that the underlying financial system is also operational. For now, perpetual futures remain the domain of crypto-native firms, proprietary trading shops, and savvy retail traders.
These instruments provide a tool for traders to gauge market direction over the weekend, and their impact on traditional markets is beginning to be felt. The shift towards 24/7 trading is likely to continue, with CME's proposed 24/7 futures contract trading potentially paving the way for a more significant transformation. As the market evolves, one thing is certain - the traditional weekend routine of waiting is becoming a thing of the past.