The mood on commodity trading desks shifts by Friday afternoon, as traders transition from focusing on profits to managing risk until markets reopen on Sunday evening. Anything can happen while markets are closed, and traders must tolerate this risk.
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.' Every commodities options trader is familiar with this ritual, and by the end of the week, the question isn't where the commodity is going, but whether they are comfortable living with their position if something happens while markets are closed. However, with the rise of cryptocurrency, traders can now react to market changes over the weekend by trading derivatives contracts called 'perpetual futures' on crypto exchanges. This shift may influence the traditional oil market, as researchers at Energy Aspects note that the dynamics of pricing short-dated West Texas Intermediate crude options are set to change due to the growth of perpetuals on crypto exchanges. The availability of perpetual contracts allows traders to hedge their bets over the weekend, potentially creating new opportunities for profit.
While this change may not significantly impact volatility, it does provide traders with more touchpoints for managing risk over the weekend. However, institutional traders are still hesitant to engage in perpetual futures trading due to lack of liquidity and infrastructure limitations. The biggest challenge may not be keeping markets open, but rather keeping the underlying financial system operational around the clock.
For now, perpetual futures remain in the domain of crypto-native firms, proprietary trading shops, and savvy retail traders. Nevertheless, perpetual markets are becoming an important source of information for traders, providing a gauge of market direction before traditional markets reopen. This may be the first signal that perpetual futures are starting to influence traditional markets, not as a replacement, but as another source of price discovery.