For years, perpetual futures have dominated the crypto trading landscape, particularly among international investors. As these contracts enter the US regulated market, Wall Street is weighing the potential of this phenomenon, wondering if it's a fleeting retail trend or a lasting disruptor to traditional futures.
Initial numbers have been striking, with Kalshi's perpetual futures reaching $1 billion in trading volume within a week of launch in June, marking the company's most successful product debut since prediction markets. This has prompted the exchange to seek regulatory approval for perpetual futures tied to gold and silver, hinting at the product's potential expansion beyond digital assets.
Perpetual futures, or 'perps,' are akin to standard futures contracts but without an expiration date, eliminating the need for traders to close or roll over positions. Periodic funding payments keep the contract's price aligned with the underlying asset. This product has become integral to global crypto trading, with Bank of America estimating annual perpetual futures volume at approximately $90 trillion.
Following the Commodity Futures Trading Commission's (CFTC) approval for Kalshi and Coinbase to offer regulated perpetual futures in the US, interest in these products is growing. However, this interest does not immediately translate to adoption within traditional Wall Street institutions.
Discussions about perps are becoming more frequent, partly due to US regulators allowing once offshore markets to move onshore. Nonetheless, large financial institutions are currently more focused on studying these products rather than preparing for significant launches. Proprietary trading firms, market makers, and newer clearing firms are likely to be the first movers, as they have more flexibility to test new venues and accept operational risks without the stringent capital rules and reputational risks faced by big banks. The potential applications of perps extend beyond speculation, offering traders a tool to manage weekend risk.
Traditional futures markets are closed over the weekends, but significant events like wars, elections, and policy decisions can occur during this time. A liquid 24-hour perpetual market could provide a solution, allowing firms to adjust positions in real-time and use weekend prices to predict where CME futures may reopen, serving as both a hedge and a source of price discovery. However, for this to materialize, there needs to be sufficient demand to justify the commitment of capital.
The challenge lies in achieving depth, as a contract may trade continuously but still pose difficulties for institutions looking to move large positions without impacting the market. Weekend liquidity remains a concern, and collateral systems may not always keep pace with the markets they support. A regulatory battle is also on the horizon, with questions surrounding the classification of perpetual contracts as either futures or swaps, which affects margin rules, registration, and liquidity provision.
Industry insiders suggest that these legal distinctions may become more critical as exchanges expand perps into traditional markets like commodities and equities. The debate is taking on a competitive edge, with CME challenging the CFTC's stance on Kalshi's bitcoin perpetuals and potential disputes emerging as exchanges seek to broaden perpetuals into other asset classes.
While some opposition may stem from concerns about market structure, it also reflects incumbent exchanges protecting their existing businesses. For now, Wall Street's approach is cautious, with trading firms recognizing a familiar product, regulators observing a market moving onshore, and exchanges seeing an opportunity to capture new volume. However, the largest banks are unlikely to take the lead, instead waiting for the regulatory environment, liquidity, and infrastructure to mature.