Perpetual futures have long been a staple in the crypto trading world, particularly among international investors. Now, with their introduction to regulated American markets, Wall Street is weighing the potential of these contracts as a lasting presence or a fleeting trend.
Early indicators have been striking, with Kalshi's perpetual futures surpassing $1 billion in trading volume within a week of their launch in June, marking the company's most successful product debut since prediction markets. The exchange has since pursued regulatory approval to offer perpetual futures tied to gold and silver, hinting at the product's potential to extend beyond digital assets like bitcoin. Perpetual futures, or 'perps,' are akin to standard futures contracts but lack an expiration date, eliminating the need for traders to close or roll over positions. Instead, periodic funding payments ensure the contract's price remains aligned with the underlying asset.
This product has become a cornerstone of global crypto trading, with Bank of America estimating an annual volume of approximately $90 trillion. Following the Commodity Futures Trading Commission's (CFTC) clearance for 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 about perps are becoming more frequent, partly due to US regulators allowing offshore markets to move onshore. However, large financial institutions are primarily studying these products rather than preparing for major launches.
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 risks. In contrast, big banks face stricter capital rules, client obligations, and reputational risks, making them more hesitant to commit without clear regulatory treatment, stable infrastructure, and years of data.
The potential applications of perps extend beyond speculation, as they could help traders manage weekend risk by providing a liquid 24-hour market. This could enable firms to adjust positions in real-time and use weekend prices to estimate the reopening prices of CME futures, making perps valuable for both hedging and price discovery. However, insiders note that demand must justify the commitment of capital, and the current depth of the market poses a challenge, with weekend liquidity remaining thin and collateral systems not always keeping pace with market movements. A regulatory battle is also unfolding, with questions about whether perpetual contracts should be treated as futures or swaps, affecting margin rules and registration duties.
The debate is becoming increasingly competitive, with incumbent exchanges like CME challenging the CFTC's treatment of certain perpetual contracts, reflecting both concerns about market structure and the protection of existing businesses. For now, Wall Street's stance is cautious, with trading firms recognizing a familiar product, regulators seeing a market moving onshore, and exchanges eyeing an opportunity to capture new volume. However, the largest banks are unlikely to take the lead, instead waiting for the regulatory environment, liquidity, and infrastructure to mature.