By Friday afternoons, commodity trading desks undergo a significant shift in focus. Instead of concentrating on making profits, traders begin to assess the level of risk they can tolerate until markets reopen on Sunday evenings.
This is because anything can happen while markets are closed, and traders are unable to adjust their positions 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.' Every commodities options trader is familiar with this ritual, where the primary concern by the end of the week is not the direction of the commodity, but rather whether they are comfortable holding their position if something unexpected happens while markets are closed. However, the rise of crypto exchanges has introduced a new dynamic, enabling traders to trade derivatives contracts called 'perpetual futures' around the clock.
This has created a 24/7 venue for oil derivatives trading, which is influencing traditional finance. Researchers at Energy Aspects note that the growth of perpetual futures on crypto exchanges is set to change how traders price short-dated West Texas Intermediate crude options. The traditional 'weekend effect' in short-dated WTI options, where implied volatility is structurally depressed on Fridays, is beginning to narrow. This development has significant implications for traders, as they can now hedge their exposure over the weekend, potentially creating new opportunities for profit.
While institutional traders have yet to fully embrace perpetual futures, the volume of these contracts has increased meaningfully over the past few months. However, the lack of meaningful liquidity and infrastructure issues, such as the inability to collect margin for perps trading on weekends, are major hurdles. Despite these challenges, perpetual futures are starting to influence traditional markets, providing a tool for traders to gauge market direction after the weekend. As the crypto industry continues to evolve, it may be one of the first areas where traditional finance is influenced by crypto innovations.
Whether perpetual futures can reshape the traditional market remains uncertain, but there are signs that old habits are already beginning to change for traders.