For years, perpetual futures have been a staple in the crypto trading world, particularly among international investors. With their introduction to regulated US markets, Wall Street is now determining whether they represent a fleeting retail trend or a lasting challenge to traditional futures. Noteworthy trading volumes have been difficult to overlook, with Kalshi's perpetual futures reaching $1 billion in trading volume within a week of their launch in June, marking the company's most successful product debut since prediction markets. The exchange has since pursued regulatory approval to offer perpetual futures tied to gold and silver, indicating the product's potential expansion beyond bitcoin and other digital assets.
Perpetual futures, or 'perps,' are akin to standard futures contracts but lack an expiration date, eliminating the need for traders to close or roll over positions. Instead, periodic funding payments maintain the contract's price in proximity to 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) clearance of Kalshi to offer these contracts on May 29, and Coinbase's subsequent approval to list regulated perpetual futures in the US, interest within Wall Street has grown, albeit cautiously. Discussions about perps have increased, partly due to US regulators permitting once offshore markets to move onshore. However, most large financial institutions are still assessing the products rather than preparing for significant launches.
Proprietary trading firms, market makers, and newer clearing firms are more likely to be the first movers, as they trade with their own capital, affording them greater freedom to test new venues and accept operational risks. In contrast, big banks face stricter capital rules, client obligations, and reputational risks, making them more hesitant to commit to a young market. The potential applications of perps extend beyond speculation, as they could help traders manage weekend risk by providing a liquid 24-hour market. This could enable firms to adjust positions in response to events and use weekend prices to estimate where traditional futures may reopen, making perps valuable for both hedging and price discovery.
However, industry insiders note that demand must be present to justify committing capital, and the issue of depth remains a challenge, with institutions facing difficulties in moving large positions without impacting the market. Regulatory debates are also emerging, with questions surrounding the treatment of perpetual contracts as futures or swaps, affecting margin rules and registration duties. As exchanges push perps into traditional markets, these legal questions may become more critical. The competitive aspect of this debate is also notable, with incumbent exchanges potentially protecting their existing businesses.
Currently, Wall Street's stance is cautious, with trading firms recognizing a familiar product, regulators observing a market moving onshore, and exchanges seeing an opportunity to capture new volume. Nonetheless, the largest banks are unlikely to take the lead, instead waiting for the rules, liquidity, and infrastructure to mature.