By Friday afternoon, the atmosphere on commodity trading desks undergoes a significant shift. For the first four days of the week, traders are focused on generating profits from their investments. However, by lunchtime on Friday, their attention turns to assessing the level of risk they can tolerate until the markets reopen on Sunday evening. The possibility of unexpected events, such as the outbreak of war, election results, or surprise announcements from OPEC, can have a significant impact on markets, leaving traders with no recourse until trading resumes.
According to Mustafa Al Niama, the former head of digital assets at Goldman Sachs, 'From around lunchtime, 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 consider whether they are comfortable holding their position over the weekend, as they are unable 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 recognize weekends.' Despite this, markets have traditionally operated on a weekday schedule, with traders planning ahead for potential weekend and after-hours catastrophes as part of their job. However, 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 rushed to speculate on prices, resulting in a sudden spike in volume over the weekend in March. Although traditional commodity markets were closed, traders were able to react by trading on crypto exchanges, which offer derivatives contracts called 'perpetual futures' that operate 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 on weekdays, it is no longer insignificant. This shift highlights the emergence of a 24/7 venue for oil derivatives trading, which is distinct from traditional finance. According to Martin Lee, market insights lead at DWF Labs, 'We're roughly seeing 2-3 times more volume on average on weekdays compared to weekends for oil perps on Hyperliquid over the last three months.' The growth of perpetual futures on crypto exchanges is likely to influence the dynamics of how traders price short-dated West Texas Intermediate (WTI) crude options.
For years, the implied volatility of WTI contracts has decreased on Fridays, as traders were reluctant to pay for protection through options or derivatives that they could not actively manage while markets were closed. However, with the availability of perpetual contracts, traders can now hedge their exposure over the weekend, which may lead to a decrease in the 'weekend effect' in short-dated WTI options. As analysts at Energy Aspects noted, 'For the first time, traders can hedge options exposure through the weekend, when geopolitical risk has become disproportionately concentrated.' The availability of perpetual contracts may create opportunities for traders to capture profits over the weekend, rather than simply holding their positions while the underlying prices of assets move sharply.
In theory, this could lead to an increase in hedging sessions, with Energy Aspects estimating that continuous futures contracts could create roughly 40% more hedging sessions over the life of a typical contract. However, finding a meaningful edge to capture a few basis points of profit remains a challenge, and most traders are cautious not to overstate the impact of perpetual futures. The lack of meaningful liquidity is a significant reason why institutional traders are still hesitant to engage with perpetual futures. While the volume of perps linked to traditional assets has increased, 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. The absence of traditional liquidity providers and the need for a different structure for weekend trading are additional challenges that institutions face.
As Gracy Chen, CEO of Bitget, noted, 'The main issue is not really that they can't, it's probably more like they don't see it as profitable enough for them to invest... at least not yet.' The biggest challenge may not be keeping the markets open, but rather keeping the financial system underneath everything open as well.
As CME's Duffy said, 'You cannot do that until you put the infrastructure in place that you have Monday through Friday.' For now, perpetual futures remain in the domain of crypto-native firms, proprietary trading shops, and savvy retail traders. However, there are signs that old habits are already beginning to change for traders, and the emergence of perpetual futures may be influencing how some traders behave.
As Al Niama noted, 'For the crypto industry, it actually is a big deal because for the longest time, we as an industry have always been the student.' The potential for perpetual futures to reshape the traditional market remains uncertain, but one thing is clear: the assumption that Friday's closing bell marks the beginning of two days when traders simply have to wait may no longer be valid.