The introduction of perpetual futures into regulated markets has sparked concerns about systemic risk, driven by high-leverage retail trading. However, this criticism is misdirected, as the risk is inherent to the trading venue, not the contract. The venue's design, including leverage limits, margin rules, and default handling, determines the level of risk.
The risk of systemic events, such as liquidation cascades, is not inherent to perpetual futures but rather a result of poor venue design. Regulatory requirements, such as segregated funds and registered clearing entities, are essential for mitigating risk. The real question is not whether perpetual futures belong in regulated markets but how a given venue is built to handle defaults and liquidations. Institutions may not want perpetual futures as a replacement for regulated futures due to their limitations, but they can be useful for hedging delta exposure.
The liquidity of perpetual futures is a significant advantage, drawing in both retail and institutional traders. By providing institutional-grade default management, venues can offer a safe and liquid environment for trading perpetual futures.
The debate surrounding perpetual futures should focus on venue design and risk management rather than the contracts themselves. A well-designed venue can contain risk and prevent systemic events, while a poorly designed one can transmit risk and exacerbate market stress.