As the week draws to a close, the atmosphere on commodity trading desks undergoes a significant shift. For the first four days of the week, traders are focused on turning a profit from their investments. However, by Friday afternoon, their attention turns to managing risk, as they must tolerate any potential market fluctuations until trading resumes on Sunday evening.
The possibility of unexpected events, such as a new war, election results, or sudden changes in global markets, can lead to significant losses if traders are unable to adjust their positions. According to Mustafa Al Niama, the former head of digital assets at Goldman Sachs, 'From about lunchtime on Friday, the desk essentially 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 whether they are comfortable holding their position over the weekend, given the inability to adjust or rebalance their bets during this time. 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.' Nevertheless, markets have traditionally been bound by the constraints of a five-day week. However, a recent development in the oil options market has disrupted this long-standing routine.
In March, as tensions between Iran and Israel escalated, oil-linked futures experienced a sudden surge in volume over the weekend. Traders flocked to cryptocurrency exchanges to trade 'perpetual futures,' which are contracts that run around the clock. The total value of all active contracts on the decentralized exchange Hyperliquid reached a record $1.2 billion on March 8, a Sunday when traditional commodity markets were closed. While weekend volume is still smaller than weekday volume, it is no longer insignificant.
This shift highlights the emergence of a 24/7 venue for oil derivatives trading, which is not yet available in traditional finance. 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 perpetual contracts on cryptocurrency exchanges. For years, the implied volatility of WTI contracts has decreased on Fridays, as traders have been reluctant to pay for protection through options or derivatives that they cannot actively manage while markets are shut.
However, with the advent of perpetual contracts, 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 development could create new opportunities for traders to capture profits over the weekend, rather than simply holding their positions while the underlying prices of assets move sharply. 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 contracts has also led to an increase in trading volume on cryptocurrency exchanges. In March and April, the average volume of crude oil perps accounted for about 2% and 4%, respectively, of the primary futures contract equivalents traded on traditional exchanges. While these numbers are still relatively small from Wall Street's perspective, they represent a significant shift in the way traders approach the weekend.
The emergence of perpetual futures has given traders a tool to gauge how the market will trade when it opens if news breaks out during the weekend. Before perps, it was largely a guess how an asset would trade once the traditional market opens. However, with perps trading 24/7, traders now have a better idea of the direction of the market after the weekend. The biggest challenge in adopting perpetual futures is not the lack of liquidity but rather the need for a broad shift in operational capacity from institutions and corporations to cater to 24/7 trading.
Large institutions, such as banks, already have systems in place for traditional market hours, but they would need to adapt their infrastructure to accommodate weekend trading. The lack of meaningful liquidity is also a major reason institutional traders are still hesitant to enter the market.
The volume of perps linked to traditional assets such as commodities and stocks has increased, but it is still not large enough for giant Wall Street trading firms to profit. Despite these challenges, there are signs that old habits are beginning to change for traders. With the advent of perpetual futures, some traders may no longer have to spend the weekend waiting; instead, they can start making money by trading or tracking these contracts.
As Flow Traders' Hein Tibosch notes, 'For lots of players, for example, a hedge fund or quant shop, if you can just have your strategies run instead of five days a week, seven days a week, that's two extra days of trading.' The future of trading may well be 24/7, and it is time for trading desks to start preparing to properly staff for an around-the-clock market.