Historically, by Friday afternoon, the atmosphere on commodity trading desks undergoes a significant shift. For the first four days of the week, traders are intensely focused on profiting from their bets. However, by lunchtime on Friday, their attention turns to assessing the level of risk they can tolerate until markets reopen on Sunday evening. This period of market closure can be particularly challenging, as unexpected events such as geopolitical tensions, election outcomes, or surprise announcements from organizations like OPEC can significantly impact market positions.
Traders must endure a 48-hour period without the ability to adjust or rebalance their bets, leaving them exposed to potential market fluctuations. According to Mustafa Al Niama, former head of digital assets at Goldman Sachs and current head of capital markets at Mysten Labs, '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 well understood by every commodities options trader, who by the end of the week, is more concerned with whether they are comfortable holding their position over the weekend than with the direction of the commodity. As Terry Duffy, chairman and CEO of CME Group, aptly puts it, 'Risk, geopolitical or not, does not know what day of the week it is.' Yet, markets have traditionally been bound by weekday operating hours, forcing traders to plan ahead for potential weekend and after-hours crises as part of their job.
However, an unusual event in the oil options market earlier this year disrupted this long-standing routine. As tensions escalated between Iran and Israel, prompting traders to speculate on prices, oil-linked futures experienced a sudden surge in volume over a weekend in March. Notably, this activity occurred when traditional commodity markets were closed, but traders did not need to wait for the traditional market to reopen before reacting; instead, they turned to crypto exchanges to trade derivatives contracts known as 'perpetual futures,' which operate around the clock. The total value of all 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 development highlights the emergence of a 24/7 venue for oil derivatives trading, distinct from traditional finance, which remains offline. Researchers at Energy Aspects note that the dynamics of pricing short-dated West Texas Intermediate (WTI) crude options are set to change due to the rapid growth of perpetuals on crypto exchanges. For years, implied volatility for WTI contracts has decreased on Fridays as traders were reluctant to pay for protection through options or derivatives that they could not actively manage while markets were shut.
However, with perpetual contracts available, traders can now hedge their exposure over the weekend, potentially leading to a reduction in the Friday selling pressure and an increase in hedging sessions. In theory, this could create new opportunities for traders to capture profits over the weekend if the market becomes chaotic. Energy Aspects estimates that if a continuous futures contract is available, it would create roughly 40% more hedging sessions over the life of a typical contract.
The growth of perpetual futures trading, particularly on decentralized exchanges like Hyperliquid, which has seen monthly perps volume of nearly $200 billion, indicates a significant shift. However, institutional traders are still cautious due to issues such as lack of meaningful liquidity and the need for a different structure to support 24/7 trading.
Large institutions, such as banks, have systems in place for traditional market hours and would need to adapt their infrastructure to accommodate weekend trading. The absence of traditional liquidity providers and the challenges in collecting margin for perps trading mid-weekend are additional hurdles.
Despite these challenges, there are signs that perpetual futures are starting to influence traditional markets, not as a replacement but as another source of price discovery. The biggest impact of perps might be their potential to reshape how some traders behave, particularly in using them as a tool to gauge market direction after the weekend.
Whether perps can actually transform the traditional market remains uncertain, but there are indications that old habits are already beginning to change for traders, who may no longer have to spend time waiting over the weekend and can instead engage in trading or tracking these contracts.