By Friday afternoons, commodity trading desks undergo a significant shift in focus. For the first four days of the week, traders concentrate on profiting from their investments.
However, by Friday lunchtime, their attention turns to managing risk until markets reopen on Sunday evenings. The possibility of unexpected events, such as geopolitical conflicts or surprise announcements, can significantly impact trading positions over the weekend. 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 assess whether they are comfortable holding their position over the weekend, given the inability to adjust or rebalance bets during this period.
Terry Duffy, chairman and CEO of CME Group, notes that 'Risk, geopolitical or not, does not know what day of the week it is.' Yet, markets have traditionally observed a weekend hiatus. A recent development in the oil options market has disrupted this long-standing routine. As tensions escalated between Iran and Israel, traders flocked to cryptocurrency exchanges to trade perpetual futures contracts, also known as 'perpetuals,' 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 volume is still smaller than on weekdays, it is no longer negligible. This shift highlights the emergence of a 24/7 venue for oil derivatives trading, distinct from traditional finance. Researchers at Energy Aspects suggest that the growth of perpetuals on cryptocurrency exchanges will alter the dynamics of short-dated West Texas Intermediate (WTI) crude options.
The implied volatility of WTI contracts, which has historically decreased on Fridays, may experience a change due to the availability of perpetual contracts for hedging over the weekend. Traders may now be more willing to hold or purchase options they would have previously sold before Friday's close. In theory, this could create new opportunities for traders to capture profits over the weekend.
Energy Aspects estimates that continuous futures contracts could generate approximately 40% more hedging sessions over the life of a typical contract. However, finding an edge to capture a few basis points of profit remains a challenge. Most traders consider this strategy theoretical until continuous trading becomes more widespread. The ability to hedge bets during the weekend is valuable, but its impact on volatility is uncertain.
One trader notes that having more touchpoints for managing risk over the weekend is beneficial, but it does not necessarily reduce volatility. The main issue preventing institutional traders from engaging with perpetuals is the lack of meaningful liquidity. The volume of perpetual contracts linked to traditional assets has increased, but it remains relatively small from Wall Street's perspective. For example, in March and April, the average volume of crude oil perpetuals accounted for only about 2% and 4%, respectively, of the primary futures contract equivalents traded on traditional exchanges.
The existing infrastructure also poses a challenge. Large institutions have systems in place for traditional market hours, but they require a different structure for weekend trading. Having the option to trade does not mean that people will automatically start doing so; a broad shift in operational capacity is necessary.
One of the structural issues is how institutions operate on weekends. Banks are closed, making it difficult to collect margin for perpetuals trading mid-weekend.
The biggest challenge may not be keeping markets open but ensuring the underlying financial system is operational. For now, perpetuals remain in the domain of cryptocurrency-native firms, proprietary trading shops, and savvy retail traders. These instruments provide a tool for gauging market direction after the weekend, giving traders a better idea of how assets will trade when traditional markets reopen.
The emergence of perpetuals might influence traditional markets, not as a replacement but as another source of price discovery. Perhaps the biggest impact of perpetuals is that they might reshape how some traders behave, with the potential to become one of the first ideas moving from cryptocurrency to traditional finance. Whether perpetuals can reshape the traditional market remains uncertain, but there are signs that old habits are changing for traders. With continuous trading hours, some traders may no longer have to spend time waiting and can start making money by trading or tracking these contracts.