By Friday afternoons, commodity trading desks undergo a significant shift in focus. For the first four days of the week, traders concentrate on making profitable bets. However, by lunchtime on Fridays, their attention turns to risk management, as they assess how much exposure they can tolerate until markets reopen on Sunday evenings. The 48-hour market closure can be a long and unpredictable period, during which unexpected events like wars, election results, or surprise announcements can impact trading positions.
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 familiar to every commodities options trader, who must weigh the risks of holding a position over the weekend, when markets are closed, and adjustments cannot be made. As Terry Duffy, chairman and CEO of CME Group, notes, 'Risk, geopolitical or not, does not know what day of the week it is.' However, markets have traditionally been bound by weekday operating hours. 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.
Traders flocked to crypto exchanges to trade perpetual futures, also known as 'perpetual futures,' which operate around the clock. 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 trading volume is still smaller than weekday volume, it is no longer negligible.
This shift highlights the emergence of a 24/7 venue for oil derivatives trading, which is changing the dynamics of the oil market. Researchers at Energy Aspects note that the growth of perpetual futures on crypto exchanges is set to alter the way traders price short-dated West Texas Intermediate (WTI) crude options. For years, implied volatility for WTI contracts has fallen on Fridays, as traders have been reluctant to pay for protection through options or derivatives that they cannot actively manage while markets are shut. However, with the availability of perpetual contracts, traders can now hedge their exposure over the weekend, which may lead to a reduction in the Friday discount in implied volatility.
The introduction of continuous futures contracts could create new opportunities for traders to capture profits over the weekend, rather than simply holding positions while markets are closed. 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.
While finding an edge to capture a few basis points of profit may sound like a trader's dream, the reality is that most traders are still cautious about the impact of perpetual futures. One trader at a proprietary market-making firm notes that 'Is volatility coming down because of that [availability of perps]?
I don't think so.' However, the trader acknowledges that having more touch points for picking up and laying off risk over the weekend is valuable. The main issue for institutional traders is that the volume of perpetual futures linked to traditional assets is still relatively small compared to traditional markets. The average volume of crude oil perps accounted for about 2% and 4% of the primary futures contract equivalents traded on traditional exchanges in March and April, respectively. While the volume of perps trading has increased meaningfully over the past few months, it is still not large enough to attract giant Wall Street trading firms.
The lack of meaningful liquidity is a significant barrier for institutional traders. Furthermore, the existing infrastructure is not designed to support 24/7 trading.
Large institutions have systems in place for traditional market hours, and they would need to adapt their infrastructure to accommodate weekend trading. 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, there are signs that old habits are changing for traders.
With the availability of continuous trading hours, some traders may no longer have to spend time waiting and can start making money either by trading or tracking these contracts. As Flow Traders' Hein Tibosch notes, 'For lots of players, for example, a hedge fund or quant shop, if you can just have your strategies run instead of five days a week, seven days a week, that's two extra days of trading.' The emergence of perpetual futures is likely to have a profound impact on traditional markets, and it may be time for trading desks to start preparing for an around-the-clock market.