The mood on commodity trading desks undergoes a significant shift by Friday afternoon, as traders transition from focusing on making profits to managing risk. With the possibility of unexpected events occurring over the weekend, traders must carefully assess their tolerance for risk until markets reopen on Sunday evening.
According to Mustafa Al Niama, former head of digital assets at Goldman Sachs, the desk's primary concern from lunchtime on Friday is determining what positions they can sustain for roughly 48 hours until the Sunday evening reopen. Every commodities options trader is familiar with this ritual, where the question at the end of the week is not about the direction of the commodity, but rather about their comfort level with their position if something unexpected happens while markets are closed. As Terry Duffy, chairman and CEO of CME Group, notes, risk does not recognize weekends, but markets still largely do.
However, a recent development in the oil options market has disrupted this long-standing routine. In March, as tensions escalated between Iran and Israel, oil-linked futures experienced a sudden surge in volume over the weekend, with traders flocking to crypto exchanges to trade perpetual futures contracts. 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 insignificant, highlighting the existence of a 24/7 venue for oil derivatives trading. 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 implied volatility for WTI contracts, which historically fell on Fridays, has begun to narrow, as traders can now hedge options exposure through the weekend.
In theory, this could create an opportunity for traders to capture profits over the weekend if the market becomes chaotic. However, finding an edge to capture a few basis points of profit remains a challenge, and traders are cautious not to overstate the impact.
The lack of meaningful liquidity is a significant reason institutional traders are still hesitant to engage in perpetual futures trading. The volume of perps linked to traditional assets has increased, but it is still relatively small from Wall Street's perspective. Large institutions require a different structure for weekend trading, and the existing infrastructure is not yet in place to support it.
The biggest challenge may not be keeping the markets open, but rather keeping the financial system underneath everything open as well. For now, perpetual futures remain in the domain of crypto-native firms, proprietary trading shops, and savvy retail traders.
However, perps are starting to play a crucial role in gauging how the market will trade when it opens after the weekend, providing traders with a better idea of the direction of their bets. The emergence of perpetual futures might be influencing how some traders behave, and it could potentially reshape the traditional market. While volumes are still modest, and big-money institutions are cautiously watching, there are signs that old habits are already beginning to change for traders.