By the end of the week, commodity trading desks undergo a significant shift in focus. For the first four days, traders are actively seeking to profit from their investments. However, by Friday lunchtime, their attention turns to managing risk, as they must tolerate potential market fluctuations until Sunday evening.
This 48-hour period can be particularly challenging for traders holding positions tied to highly active markets, as they are unable to adjust or rebalance their bets until trading resumes. According to Mustafa Al Niama, former head of digital assets at Goldman Sachs, '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 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, noted, 'risk, geopolitical or not, does not know what day of the week it is.' However, markets have traditionally been constrained by weekday operating hours. Earlier this year, an unusual event occurred in the oil options market, disrupting this long-standing routine.
As tensions escalated between Iran and Israel, traders flocked to crypto exchanges over the weekend to trade derivatives contracts called 'perpetual futures,' which operate around the clock. The total value of 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 on weekdays, it is no longer negligible.
This shift has significant implications for traders, who can now hedge their bets during the weekend, potentially capturing profits in the event of market chaos. Researchers at Energy Aspects noted that the dynamics of short-dated West Texas Intermediate crude options are set to change, thanks to the growth of perpetual futures on crypto exchanges.
The traditional 'weekend effect' in short-dated WTI options, where implied volatility is structurally depressed on Fridays, may be mitigated by the availability of perpetual contracts. Traders can now hedge their exposure through the weekend, which could lead to increased demand for options and a reduction in the Friday selling pressure. However, finding a counterparty to take the other side of a trade remains a significant challenge, particularly for large institutions. The lack of meaningful liquidity is a major reason institutional traders are still hesitant to engage with perpetual futures.
The volume of perps linked to traditional assets, such as commodities and stocks, has increased, but it is still relatively small compared to traditional exchanges. For example, in March and April, the average volume of crude oil perps accounted for only about 2% and 4%, respectively, of the primary futures contract equivalents traded on traditional exchanges. Furthermore, issues with existing infrastructure, such as the need for 24/7 systems and the ability to collect margin and move collateral, pose significant challenges for large institutions.
As a result, perpetual futures remain largely the domain of crypto-native firms, proprietary trading shops, and savvy retail traders. However, there are signs that traditional finance is beginning to take notice, with some traders using perps to gauge market direction before traditional markets reopen. The emergence of perpetual futures may be influencing how some traders behave, with the potential to become one of the first ideas to move from the crypto industry to traditional finance.
Whether perps can reshape the traditional market remains uncertain, but there are indications that old habits are already beginning to change for traders.