The popularity of perpetual futures, a staple in crypto trading, has been evident for years, particularly among investors outside the US. Now, with their introduction into regulated American markets, Wall Street is grappling with whether these contracts represent a fleeting retail trend or a lasting challenge to traditional futures. Notable trading volumes have been recorded, with Kalshi's perpetual futures surpassing $1 billion in trading volume within a week of launch.
This has prompted the exchange to seek regulatory approval for contracts tied to gold and silver, indicating the potential for the product to expand beyond digital assets. Perpetual futures, or 'perps,' are distinct from standard futures contracts in that they do not expire, eliminating the need for traders to close or roll positions into new contracts. Instead, periodic funding payments maintain the contract's price alignment 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) clearance of Kalshi to offer these contracts, and Coinbase's approval to list regulated perpetual futures in the US, interest within Wall Street has grown, albeit cautiously.
Discussions among people familiar with the matter indicate that while perps are gaining more attention, their adoption by large financial institutions is hindered by stricter capital rules, client obligations, and reputational risk. In contrast, proprietary trading firms, market makers, and newer clearing firms are more likely to be the first movers, given their greater freedom to test new venues and accept operational risk. The potential applications of perps extend beyond speculation, offering traders a means to manage weekend risk and providing a liquid 24-hour market that could facilitate price discovery and hedging.
However, industry insiders emphasize that demand must justify the commitment of capital, and the current lack of depth, thin weekend liquidity, and regulatory uncertainties pose significant challenges. A regulatory fight is also unfolding, with questions over whether perpetual contracts should be treated as futures or swaps, affecting margin rules and liquidity provision.
Competitive dynamics are at play, with incumbent exchanges like CME challenging the CFTC's regulatory approach to bitcoin perpetuals, suggesting that some opposition may be driven by a desire to protect existing businesses. For now, Wall Street's stance is one of cautious observation, with trading firms, regulators, and exchanges acknowledging the potential of perpetual futures while awaiting clearer rules, improved liquidity, and more robust infrastructure.