The traditional commodities trading desk undergoes a significant shift in focus by Friday afternoon. For the first four days of the week, traders are primarily concerned with generating profits from their investments. However, as the weekend approaches, their attention turns to risk management, as they must tolerate potential market fluctuations until trading resumes on Sunday evening. Various events, such as geopolitical conflicts, election results, or unexpected announcements, can significantly impact markets during this period.
As a result, traders must carefully assess their positions and decide what level of risk they are willing to accept. 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 consider whether they are comfortable holding their position over the weekend, given the inability to adjust or rebalance their bets during this time. Terry Duffy, chairman and CEO of CME Group, notes that 'risk, geopolitical or not, does not know what day of the week it is,' emphasizing the need for traders to be prepared for potential market fluctuations at any time. The recent escalation of tensions between Iran and Israel led to a surge in oil-linked futures trading over a weekend in March, with traders flocking to crypto exchanges to trade derivatives contracts called 'perpetual futures,' which operate 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 on weekdays, it is no longer negligible.
The growth of perpetual futures on crypto exchanges is influencing the oil market, with researchers at Energy Aspects noting that the dynamics of short-dated West Texas Intermediate crude options are changing. The implied volatility of WTI contracts, which had historically fallen on Fridays, has begun to narrow, as traders can now hedge their exposure through perpetual futures over the weekend. This development has implications for the 'weekend effect' in short-dated WTI options, where implied volatility is structurally depressed on Fridays.
The availability of perpetual contracts allows traders to capture profits over the weekend if the market becomes chaotic, rather than simply holding their positions. However, finding a competitive edge to capture a few basis points of profit remains a challenge, and traders are cautious not to overstate the impact of perpetual futures. The trader at a proprietary market-making firm notes that 'is volatility coming down because of that?
I don't think so,' but acknowledges that having more touchpoints for picking up and laying off risk over the weekend is valuable. The main issue preventing institutional traders from participating in perpetual futures is the lack of meaningful liquidity. The volume of perps linked to traditional assets has increased, but it is still relatively small from Wall Street's perspective. Furthermore, existing infrastructure issues, such as the need for a different structure for weekend trading and the limitations of traditional financial systems, hinder the adoption of perpetual futures by large institutions.
As a result, perpetual futures remain in the domain of crypto-native firms, proprietary trading shops, and savvy retail traders. However, there are signs that old habits are changing, and some traders are beginning to use perpetual futures to gauge market direction over the weekend.
The emergence of perpetual futures might be one of the first instances where traditional finance is influenced by crypto innovations. Whether perpetual futures can reshape the traditional market remains uncertain, but there are indications that they are already having an impact on trader behavior. As Flow Traders' Hein Tibosch notes, 'for lots of players, for example, a hedge fund or quant shop, if you can just have your strategies run instead of five days a week, seven days a week, that's two extra days of trading.' The future of trading may involve 24/7 markets, and it is time for trading desks to prepare for an around-the-clock market, abandoning the traditional 'weekend effect.'