By Friday afternoons, commodity trading desks undergo a significant shift in focus. For the first four days of the week, traders are primarily concerned with making profitable trades. However, as the weekend approaches, their attention turns to managing risk and tolerating potential losses until markets reopen on Sunday evenings.
The 48-hour period can be particularly challenging for traders holding positions tied to actively traded markets, as they are unable to adjust or rebalance their bets during this time. According to Mustafa Al Niama, former head of digital assets at Goldman Sachs, 'From about lunchtime on Fridays, trading desks essentially stop focusing on making money and start thinking about what they can live with for roughly 48 hours until the Sunday evening reopen.' This ritual is well-known among commodities options traders, who must assess whether they are comfortable holding their positions 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 recognize weekends.' However, markets have traditionally been structured around a Monday-to-Friday schedule, with traders planning for potential weekend and after-hours catastrophes as part of their job.
Earlier this year, an unusual event occurred in the oil options market, disrupting 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 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 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 narrowing the Friday discount in implied volatility.
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. The emergence of perpetual futures has also created an opportunity for traders to capture profits over the weekend if the market becomes chaotic. However, finding any edge to capture a few basis points of profit sounds like a theoretical concept for most traders.
Even traders who find the strategy plausible are cautious not to overstate its impact. The main issue is that institutional traders are still staying away due to a lack of meaningful liquidity.
The volume of perps linked to traditional assets such as commodities and stocks 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 will need a different structure for weekend trading. The existing infrastructure is a significant challenge, as banks are closed on weekends, and it would be hard to collect margin for perps trading mid-weekend. Even when weekend trading is available, much of the financial infrastructure that large institutions rely on still isn't.
The biggest challenge may not be keeping the markets open but 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, they give traders a tool to gauge how the market will trade when it opens if news breaks out during the weekend. Perpetual markets have become another source of information before traditional markets reopen, providing traders with some direction. Perhaps the biggest impact of perps thus far is that they might be influencing how some traders behave, with the instrument potentially becoming one of the first ideas moving from crypto to traditional finance.
Whether perps can reshape the traditional market remains uncertain, but there are signs that old habits are already beginning to change for traders.