The popularity of perpetual futures in the crypto space has been evident for years, particularly among international investors. Now, as these contracts make their way into regulated American markets, Wall Street is weighing the potential of this trading product to become a lasting phenomenon rather than a fleeting trend. Initial indications have been promising, with Kalshi's perpetual futures reaching $1 billion in trading volume within a week of launch.
This has prompted 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, or 'perps,' differ from standard futures contracts in that they do not have an expiration date, eliminating the need for traders to close or roll over positions periodically. Instead, these contracts utilize periodic funding payments to maintain a price close to the underlying asset.
Bank of America estimates that the annual volume of perpetual futures could be around $90 trillion, underscoring the significant potential of this market. Following the Commodity Futures Trading Commission's (CFTC) clearance for Kalshi and Coinbase to offer regulated perpetual futures in the US, discussions about these products have become more frequent within Wall Street. However, large financial institutions are taking a cautious approach, choosing to study the products rather than launch them immediately.
Proprietary trading firms, market makers, and newer clearing firms are more likely to be the first movers, given their greater freedom to test new venues and accept operational risks. The disparity in adoption speeds among different Wall Street groups is notable, with individual traders and smaller firms typically at the forefront, followed by market makers once volume increases, and banks requiring years of data and clear regulatory frameworks before committing significant resources. Beyond speculation, perpetual futures could offer practical applications, such as managing weekend risk when traditional futures markets are closed. A liquid, 24-hour perpetual market could enable firms to adjust positions in response to events and use weekend prices to estimate the reopening prices of CME futures, making perps valuable for both hedging and price discovery.
Industry insiders emphasize that demand must be present to justify the commitment of capital, but the current challenge lies in achieving sufficient depth. While contracts may trade continuously, institutions face difficulties in moving large positions without impacting the market, especially during weekends when liquidity is thinner.
Regulatory debates are also emerging, particularly regarding the classification of perpetual contracts as futures or swaps, which affects margin rules and registration duties. The competitive aspect of these debates suggests that some opposition may stem from incumbent exchanges seeking to protect their existing businesses. For now, Wall Street's stance is one of caution, with trading firms, regulators, and exchanges recognizing the potential of perpetual futures but awaiting clearer rules, improved liquidity, and more robust infrastructure before making significant moves.