By Friday afternoons, commodity trading desks undergo a significant shift in focus. Instead of concentrating on making profits, traders start to think about managing risk until markets reopen on Sunday evenings. This is because unexpected events can occur over the weekend, such as geopolitical conflicts, election results, or surprise announcements, which can impact trading positions.
Traders must assess their risk tolerance for the next 48 hours, during which they cannot adjust their bets. 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 decide whether they are comfortable holding their position over the weekend, given the potential for unforeseen events. However, the rise of crypto exchanges has introduced a new dynamic, allowing traders to react to events in real-time, rather than waiting for traditional markets to reopen.
The oil options market experienced a significant spike in volume over a weekend in March, as tensions between Iran and Israel escalated, and traders flocked to crypto exchanges to trade perpetual futures contracts. This shift has implications for the traditional 'weekend effect' in short-dated West Texas Intermediate crude options, where implied volatility is typically depressed on Fridays. With the availability of perpetual contracts, traders can now hedge their exposure over the weekend, potentially leading to increased trading activity and reduced Friday selling pressure. While the volume of perpetual futures contracts is still relatively small compared to traditional markets, it is growing, and traders are beginning to recognize the value of being able to hedge their bets over the weekend.
The emergence of crypto exchanges has provided a 24/7 venue for oil derivatives trading, which is influencing the traditional market and forcing traders to rethink their strategies. As one trader noted, 'you have more touch points for picking up and laying off risk over the weekend than you had before.' However, institutional traders are still cautious, citing lack of liquidity and infrastructure as major hurdles.
The biggest challenge may not be keeping markets open, but rather keeping the underlying financial system operational. For now, perpetual futures contracts remain the domain of crypto-native firms, proprietary trading shops, and savvy retail traders. Nevertheless, these contracts are providing a tool for traders to gauge market direction over the weekend, and their influence on traditional markets is likely to grow.
As CME's Terry Duffy noted, 'I think that markets will be 24/7 down the road. All markets.'