The popularity of perpetual futures has been a staple in the crypto trading world, particularly among international investors. Now, with their introduction to regulated American markets, Wall Street is debating whether they represent a fleeting retail fad or a lasting challenge to traditional futures.
Initial numbers have been impressive, with Kalshi's perpetual futures reaching $1 billion in trading volume within a week of launch in June. This has led the exchange to seek regulatory approval for perpetual futures tied to gold and silver, indicating the product's potential to expand beyond digital assets. Perpetual futures, also known as 'perps,' are similar to standard futures contracts but lack an expiration date. Instead of closing or rolling over positions, traders make periodic funding payments to keep the contract's price aligned with the underlying asset.
This product has become integral to global crypto trading, with Bank of America estimating annual perpetual futures volume at approximately $90 trillion. Following the Commodity Futures Trading Commission's (CFTC) clearance for Kalshi to offer these contracts, and Coinbase's approval to list regulated perpetual futures in the U.S., interest in perps is growing.
However, this interest does not necessarily translate to immediate adoption within traditional Wall Street institutions. Discussions among people familiar with the matter indicate that while perps are being considered, most large financial institutions are still in the process of studying the products rather than preparing for major launches. The first movers are likely to be proprietary trading firms, market makers, and newer clearing firms, which have more freedom to test new venues and accept operational risks.
In contrast, big banks face stricter capital rules, client obligations, and reputational risks, making them more cautious in their approach. The potential applications of 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, making perps useful for both hedging and price discovery. Despite the demand, firms are hesitant to commit balance sheet capital until customer activity justifies it.
The main issue is depth, as a contract may trade continuously but institutions may struggle to move large positions without impacting the market. Regulatory fights are also emerging, with questions over whether perpetual contracts should be treated as futures or swaps, affecting margin rules and registration duties. The debate is becoming increasingly competitive, with incumbent exchanges potentially protecting their existing businesses.
For now, Wall Street's stance is cautious, with trading firms recognizing a familiar product, regulators seeing a market moving onshore, and exchanges viewing an opportunity to capture new volume. However, the largest banks are unlikely to take the lead, instead waiting for the rules, liquidity, and infrastructure to mature.