By Friday afternoons, the atmosphere on commodity trading desks undergoes a significant shift. For the first four days of the week, traders are focused on making profitable bets. However, by Friday lunchtime, their attention turns to managing risk, as they must tolerate potential market fluctuations until Sunday evening when markets reopen.
The weekend can be a prolonged period, especially for traders holding positions tied to highly active markets, with no opportunity to adjust or rebalance their bets until trading resumes. 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.' This ritual is familiar to every commodities options trader, as they must assess whether they are comfortable holding their position over the weekend, given the inability to adjust or rebalance their bets during this time. Terry Duffy, chairman and CEO of CME Group, notes that 'risk, geopolitical or not, does not know what day of the week it is,' highlighting the unpredictability of market developments. However, markets have traditionally been bound by weekday operating hours, with traders planning for potential weekend and after-hours catastrophes as part of their job.
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 flocked to crypto exchanges over the weekend to trade derivatives contracts called 'perpetual futures,' which operate around the clock. The total value of 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 negligible. This shift highlights the emergence of a 24/7 venue for oil derivatives trading, which is distinct from traditional finance.
Researchers at Energy Aspects note that the dynamics of pricing short-dated West Texas Intermediate (WTI) crude options are set to change due to the rapid growth of perpetuals on crypto exchanges. For years, implied volatility for WTI contracts has fallen on Fridays, as traders were reluctant to pay for protection through options or derivatives that they couldn't actively manage while markets were shut. However, with the availability of perpetual contracts, traders can now hedge their options exposure over the weekend, potentially altering the 'weekend effect' in short-dated WTI options. The introduction of perpetual contracts may create an opportunity for traders to capture profits over the weekend, rather than simply holding their positions.
Energy Aspects estimates that if a continuous futures contract is available, it would create roughly 40% more hedging sessions over the life of a typical contract. While finding an edge to capture a few basis points of profit may seem like a trader's dream, most traders are cautious not to overstate its impact. One trader at a proprietary market-making firm notes that 'is volatility coming down because of that [availability of perps]? I don't think so.' However, the trader acknowledges that having more touchpoints for managing risk over the weekend is valuable.
The main issue preventing institutional traders from participating in perps trading is the lack of meaningful liquidity. The volume of perps linked to traditional assets has increased, but it remains relatively small from Wall Street's perspective. For example, in March and April, the average volume of crude oil perps accounted for about 2% and 4%, respectively, of the primary futures contract equivalents traded on traditional exchanges.
Large institutions, such as banks, already have systems in place for traditional market hours, but they would need a different structure for weekend trading. DWF's Martin Lee notes that 'having the option to trade does not mean that people would automatically start doing so. There needs to be a broad shift in operational capacity from institutions and corporations to be able to cater to that.' One of the structural issues is how institutions operate on weekends. Banks are closed on Saturdays and Sundays, making it difficult to collect margin for perps trading mid-weekend.
Mysten Labs' Mustafa Al Niama adds that large institutions would need the backing of clearing and settlement rails that actually move money, which is currently mostly on weekdays. The biggest challenge may not be keeping the markets open, but rather keeping the financial system underneath everything open as well.
For now, perps remain in the domain of crypto-native firms, proprietary trading shops, and savvy retail traders. However, perpetual markets have become another source of information before traditional markets reopen, providing traders with a better idea of the bets' direction after the weekend. The emergence of perps might be influencing how some traders behave, with the potential to reshape the traditional market.
Whether perps can actually reshape the traditional market remains uncertain, but there are signs that old habits are already beginning to change for traders. On Friday afternoons, traders will still worry about the weekend, but with continuous trading hours, some may no longer have to spend time waiting and can start making money by trading or tracking these contracts.