By Friday afternoon, the atmosphere on commodity trading desks undergoes a significant change. For the first four days of the week, traders focus on making profitable bets. However, by lunchtime on Friday, their attention shifts to assessing the level of risk they can tolerate until markets reopen on Sunday evening.
The possibility of unexpected events, such as news of a new war, election results, or sudden announcements, can significantly impact markets, leaving traders with no recourse until trading resumes. According to Mustafa Al Niama, former head of digital assets at Goldman Sachs, 'From about lunchtime, the desk essentially 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 consider whether they are comfortable holding their position over the weekend, given the inability to adjust or rebalance their bets during this time. As Terry Duffy, chairman and CEO of CME Group, noted, 'Risk, geopolitical or not, does not know what day of the week it is.' However, markets have traditionally been bound by weekday operating hours, requiring traders to plan ahead for potential weekend and after-hours catastrophes. Earlier this year, an unusual event in the oil options market 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 highlights the emergence of a 24/7 venue for oil derivatives trading, which is not yet available in traditional finance.
Researchers at Energy Aspects noted that the dynamics of pricing short-dated West Texas Intermediate (WTI) crude options are set to change due to the rapid growth of perpetual futures on crypto exchanges. For years, implied volatility for WTI contracts has fallen on Fridays, as traders were reluctant to pay for protection through options or derivatives that they couldn't actively manage while markets were shut.
However, with the availability of perpetual contracts, traders can now hedge their exposure over the weekend, potentially leading to a decrease in the 'weekend effect' in short-dated WTI options. The growth of perpetual futures trading has significant implications for traders, who can now 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. While finding any edge to capture a few basis points of profit sounds appealing, most traders consider this strategy theoretical until continuous trading becomes more widespread.
The main issue is that institutional traders are still hesitant to participate in perpetual futures trading due to lack of meaningful liquidity. The volume of perps linked to traditional assets has increased, but it is still relatively small from Wall Street's perspective.
Large institutions, such as banks, already have systems in place for traditional market hours, but they would need a different structure for weekend trading. The existing infrastructure is not yet equipped to support 24/7 trading, with banks closed on weekends and clearing systems operating on weekday hours. The biggest challenge may not be keeping 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. These instruments provide a tool for traders to gauge how the market will trade when it opens if news breaks out during the weekend. The emergence of perpetual futures might be influencing how some traders behave, with the potential to reshape the traditional market. While volumes are still modest, and big-money institutions are cautiously watching, there are signs that old habits are already beginning to change for traders.
With the possibility 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.