By Friday afternoons, commodity trading desks undergo a significant shift in focus. For the first four days of the week, traders are actively seeking to capitalize on their investments.
However, as the weekend approaches, their attention turns to managing risk and determining how much exposure they can tolerate until markets reopen on Sunday evening. The possibility of unexpected events, such as geopolitical conflicts or surprise announcements, can lead to significant market fluctuations, leaving traders with limited options to respond 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 well-known among commodities options traders, who must assess their positions and decide whether they are comfortable holding them 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.' Despite this, markets have traditionally been structured around a Monday-to-Friday schedule, with traders planning ahead for potential weekend and after-hours catastrophes as part of their job.
However, a recent development in the oil options market has disrupted 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 all 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 has significant implications for the oil market, particularly in the pricing of short-dated West Texas Intermediate (WTI) crude options. Researchers at Energy Aspects note that the dynamics of how traders price these options are set to change, thanks to the rapid growth of perpetual futures on crypto exchanges.
The traditional 'weekend effect' in short-dated WTI options, where implied volatility is structurally depressed on Fridays, is beginning to narrow. With perpetual contracts available, traders can now hedge their options exposure over the weekend, which may lead to a willingness to hold or even buy options they previously would have sold before Friday's close.
In theory, this could create new opportunities for traders to capture profits over the weekend if the market becomes chaotic. 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.
The growth of perpetual futures trading is not limited to crypto exchanges. CME recently announced plans to add smaller-sized 24/7 contracts for WTI crude and gold, which could help traders hedge their weekend bets and reduce the Friday selling pressure.
However, the launch of these contracts is uncertain due to regulatory hurdles. The impact of perpetual futures on traditional markets is still being debated. While some traders believe that the availability of perps has reduced volatility, others argue that it has simply provided a new tool for traders to manage their risk. One trader at a proprietary market-making firm notes that 'You have more touch points for picking up and laying off risk over the weekend than you had before.
You had zero [places to hedge] before, and now you have more than zero.' The biggest challenge in adopting perpetual futures trading is not the lack of liquidity but rather the infrastructure to support it. Large institutions, such as banks, already have systems in place for traditional market hours, but they need a different structure for 24/7 trading.
The existing infrastructure, including clearing and settlement systems, is not designed to handle weekend trading. BitGet's CEO, Gracy Chen, notes that 'The main issue is not really that they can't, it's probably more like they don't see it as profitable enough for them to invest … at least not yet.' The volume of perps linked to traditional assets such as commodities and stocks has increased significantly over the past few months, but it is still relatively small compared to traditional markets. 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. While these numbers are significant for crypto, they are still modest from Wall Street's perspective.
The trader at the proprietary market-making firm notes that 'The hardest thing about trading is finding someone who wants to take the other side. In the absence of traditional liquidity providers, how are you gonna get that bet on big enough such that you care about the result?' Despite these challenges, there are signs that perpetual futures are starting to influence traditional markets. Traders are increasingly watching crypto markets over the weekend to gauge where traditional futures may begin trading once the CME opens. This shift has significant implications for the traditional market, particularly in the pricing of short-dated WTI crude options.
The emergence of perpetual futures has created a new tool for traders to manage their risk and potentially capture profits over the weekend. As the market continues to evolve, it is likely that we will see a broader shift towards 24/7 trading, with traditional markets adopting the infrastructure and systems needed to support it. CME's Duffy notes that 'I think that markets will be 24/7 down the road. All markets.'