By Friday afternoons, the atmosphere on commodity trading desks undergoes a significant shift. For the first four days of the week, traders focus on profiting from their investments. However, as the week draws to a close, their attention turns to managing risk until markets reopen on Sunday evenings.
The possibility of unexpected events, such as geopolitical developments or market-moving announcements, can lead to significant fluctuations in the markets, leaving traders with limited options until trading resumes. According to Mustafa Al Niama, former head of digital assets at Goldman Sachs, 'From about lunchtime, the desk 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 assess their comfort level with their positions over the weekend, when they cannot adjust or rebalance their bets. As Terry Duffy, chairman and CEO of CME Group, notes, 'Risk, geopolitical or not, does not know what day of the week it is.' However, markets have traditionally been bound by weekday operating hours, with traders planning ahead for potential weekend and after-hours events as part of their job. A recent development in the oil options market has disrupted this long-standing routine.
As tensions between Iran and Israel escalated, oil-linked futures experienced a sudden surge in volume over a weekend in March. Traders flocked to crypto exchanges to trade perpetual futures contracts, which operate around the clock.
The total value of active contracts on the decentralized exchange Hyperliquid reached a record $1.2 billion on a Sunday when traditional commodity markets were closed. While weekend volume is still smaller than on weekdays, it is no longer negligible. This shift highlights the emergence of a 24/7 venue for oil derivatives trading, which is distinct from traditional finance. Researchers at Energy Aspects note that the dynamics of pricing short-dated West Texas Intermediate crude options are set to change due to the growth of perpetual futures on crypto exchanges.
The implied volatility of WTI contracts, which had historically fallen on Fridays, has begun to narrow. Traders can now hedge their exposure over the weekend, which may lead to a reduction in the 'weekend effect' in short-dated WTI options. In theory, this could create new opportunities for traders to capture profits over the weekend, rather than simply sitting on their positions.
However, finding an 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 ability to hedge bets during the weekend is valuable, but it requires a different structure and infrastructure than traditional weekday trading.
Large institutions, such as banks, need to adapt their systems to accommodate 24/7 trading, which is a significant challenge. The biggest hurdle may not be keeping the markets open, but rather keeping the underlying financial system 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 gauging market direction over the weekend, which can help traders prepare for the opening of traditional markets.
The emergence of perpetual futures may be influencing traditional markets, not as a replacement, but as an additional source of price discovery. Whether perpetual futures can reshape the traditional market remains uncertain, but there are signs that old habits are already beginning to change for traders.