The perennially popular perpetual futures, a staple in the crypto trading world, are now entering the regulated US market, prompting Wall Street to ponder whether they are a fleeting retail fad or a lasting threat to traditional futures. The initial numbers are striking, with Kalshi's perpetual futures reaching $1 billion in trading volume within a week of launch in June. This has led to the exchange seeking regulatory approval to offer perpetual futures tied to gold and silver, hinting that the product may transcend its current confines in bitcoin and digital assets.
Perpetual futures, also known as 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 close to the underlying asset.
This product has become a cornerstone of global crypto trading, with Bank of America estimating annual perpetual futures volume at approximately $90 trillion. Following the Commodity Futures Trading Commission's (CFTC) clearance of Kalshi to offer these contracts, and Coinbase's subsequent approval to list regulated perpetual futures in the US, interest in perps is gaining traction within Wall Street. However, this interest does not necessarily translate to immediate adoption, as large financial institutions are still in the process of studying the 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. The disparity in approach stems from the stricter capital rules, client obligations, and reputational risks faced by big banks, which may find the potential profits in this nascent market insufficient to justify the costs of building compliance, clearing, and risk systems.
The potential applications of perps extend beyond speculation, as they could facilitate traders' management of weekend risk, given that traditional futures markets are closed during parts of the weekend. A liquid 24-hour perpetual market could enable firms to adjust positions as events unfold and utilize weekend prices to estimate where CME futures may reopen, making perps useful for both hedging and price discovery.
However, industry insiders note that the demand must be present to justify the commitment of capital, and the current issue lies in depth, with contracts trading around the clock but institutions facing challenges in moving large positions without significantly impacting the market. The regulatory landscape is also evolving, with questions surrounding the classification of perpetual contracts as futures or swaps, affecting margin rules, registration duties, and liquidity provision. As the debate unfolds, it is becoming increasingly competitive, with incumbent exchanges like CME challenging the CFTC's treatment of certain perpetual contracts, and similar disputes potentially emerging as exchanges expand perps into traditional markets.
For the time being, Wall Street's stance is one of caution rather than outright hostility, with trading firms recognizing a familiar product, regulators observing a market moving onshore, and exchanges seeing an opportunity to capture new volume, albeit with the largest banks likely to wait for the rules, liquidity, and infrastructure to mature.