Perpetual futures, a highly popular trading product in the crypto space, have officially entered the US market. Following their launch, agile trading firms and crypto exchanges are racing to capitalize on the massive retail demand.
However, traditional Wall Street banks are taking a more cautious approach, choosing to wait until the market's liquidity, rules, and infrastructure mature. The product has garnered significant attention, with Kalshi's perpetual futures reaching $1 billion in trading volume within a week of its launch in June. This milestone has led the exchange to seek regulatory approval for offering 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 requiring traders to close or roll over their positions, these contracts utilize periodic funding payments to maintain a price close to the underlying asset. As a result, perps have become a core component of global crypto trading, with Bank of America estimating their annual volume to be around $90 trillion. The Commodity Futures Trading Commission (CFTC) has cleared Kalshi and Coinbase to offer regulated perpetual futures in the US.
Despite the growing interest, large financial institutions are still in the process of studying the product rather than preparing for major launches. Proprietary trading firms, market makers, and newer clearing firms are more likely to be the first movers. The difference in approach can be attributed to the fact that large banks face stricter capital rules, client obligations, and reputational risk, making them more cautious in their adoption of new products. In contrast, prop shops have more freedom to test new venues and accept operational risks.
The potential use cases for perps extend beyond speculation, as they could help traders manage weekend risk. Traditional futures markets are closed during parts of the weekend, leaving traders vulnerable to unexpected events. A liquid 24-hour perpetual market could provide a solution, enabling firms to adjust their positions in response to events and use weekend prices to estimate where CME futures may reopen.
Industry insiders believe that perps could be useful for both hedging and price discovery. However, the demand for these products needs to be substantial to justify the commitment of capital. One of the major challenges is depth, as a contract may trade around the clock but still lack the liquidity to support large positions without shifting the market. The regulatory environment is also a concern, with questions surrounding the treatment of perpetual contracts as either futures or swaps.
This distinction affects margin rules, registration duties, and who can provide liquidity. The debate is becoming increasingly competitive, with CME challenging the CFTC's treatment of Kalshi's bitcoin perpetuals. As exchanges push to expand perps into commodities, equities, and other traditional markets, similar disputes may arise. For now, Wall Street's view on perpetual futures is cautious rather than hostile, with trading firms, regulators, and exchanges all seeing opportunities in the product.
However, the largest banks are unlikely to take the lead, instead choosing to wait for the rules, liquidity, and infrastructure to catch up.