The introduction of perpetual futures to regulated markets has sparked concerns about systemic risk, with critics arguing that these high-leverage instruments will destabilize the market. However, this criticism is misdirected, as the risk associated with perpetual futures is actually a function of the venue on which they are traded, rather than the contract itself. The design of the venue, including aspects such as leverage limits, margin rules, and default handling, plays a crucial role in determining the level of risk. The contract itself is not inherently risky, but rather the choices made by the venue can either mitigate or exacerbate potential risks.
The recent history of crypto markets has shown that deleveraging episodes can have severe consequences, but these are often the result of a combination of factors, including macro shocks, stablecoin de-pegs, and exchange outages. The key factor that turns a sell-off into a systemic event is the risk transmission mechanism, which in crypto is often the liquidation cascade. This is where the design of the venue comes into play, as a manipulable index or auto-deleveraging mechanism can amplify the effects of a liquidation cascade.
In contrast, a well-designed venue can contain the risk of default and prevent it from spreading to other parts of the market. The question, therefore, is not whether perpetual futures belong in regulated markets, but rather how the venue is designed to manage risk. Regulatory requirements provide a baseline level of security, but the specific choices made by the venue can vary widely, even within the regulated perimeter. Another criticism of perpetual futures is that they may not be suitable for institutional investors, who may prefer more traditional futures contracts.
However, this criticism misses the point that institutions are not looking to use perpetual futures as a replacement for dated futures, but rather as a tool for hedging delta exposure. The liquidity of perpetual futures makes them an attractive option for institutions, which are willing to trade off some elegance in their hedging strategy for the sake of execution.
The design of perpetual futures, which draws in retail flow and concentrates liquidity, is a key factor in their appeal to institutions. The debate over perpetual futures, therefore, is not about whether they are inherently risky, but rather about how to design a venue that can safely manage the risks associated with them.
The answer lies in institutional-grade default management, which can contain the systemic risk that critics fear. The question is not 'are perpetuals dangerous?' but rather 'how does a venue handle a default when the market is under stress?' The standard for regulated clearing has been established for decades, and it is this standard that Bullish is building towards. By designing a venue that can contain the risk of default and provide a safe and liquid market for institutions, perpetual futures can become a valuable tool for hedging and risk management.