As the week draws to a close, commodity trading desks undergo a significant shift in focus. From Monday to Thursday, traders are actively seeking to profit from their investments.
However, by Friday lunchtime, their attention turns to managing risk, as they must tolerate potential market fluctuations until Sunday evening when trading resumes. This 48-hour period can be particularly challenging, especially for traders holding positions tied to highly volatile markets, as they are unable to adjust or rebalance their bets until the markets reopen. 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 well-known among commodities options traders, who by the end of the week, are more concerned with whether they can comfortably hold their position over the weekend, rather than where the commodity is headed.
Terry Duffy, chairman and CEO of CME Group, notes that 'Risk, geopolitical or not, does not know what day of the week it is,' highlighting the unpredictable nature of markets. However, traditional markets have historically been bound by weekday operating hours, leaving traders to plan ahead for potential weekend catastrophes. 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 '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 a Sunday when traditional commodity markets were closed. While weekend volume is still smaller than on weekdays, it is no longer negligible. This shift has significant implications for the oil market, particularly in the pricing of short-dated West Texas Intermediate (WTI) crude options.
Researchers at Energy Aspects note that the implied volatility of WTI contracts, which had historically fallen on Fridays, has begun to narrow. This change is attributed to the growth of perpetual contracts on crypto exchanges, allowing traders to hedge their exposure over the weekend. In theory, this development could create new opportunities for traders to capture profits during periods of market chaos. However, finding a competitive edge in this space remains a challenge, and traders are cautious not to overstate the impact of perpetual futures.
One trader at a proprietary market-making firm notes that while the availability of perps is valuable for hedging, it may not directly influence volatility. Instead, it provides traders with more opportunities to manage risk over the weekend. The growth of perpetual futures has also sparked interest among institutional clients, although the majority of volume still comes from the retail market. Gracy Chen, CEO of Bitget, notes that institutional traders are not yet invested in perps, likely due to concerns over profitability and liquidity.
The lack of meaningful liquidity is a significant barrier to entry for giant Wall Street trading firms. Meanwhile, crypto-native firms, proprietary trading shops, and savvy retail traders are driving the demand for perps. These instruments have become a tool for traders to gauge market direction over the weekend, providing a better indication of how assets will trade when traditional markets reopen.
Hein Tibosch, head of digital assets OTC and product at Flow Traders, notes that perpetual markets have become an essential source of information for traders. The emergence of perps may be one of the first instances where crypto innovations are influencing traditional finance. While volumes remain modest, and big-money institutions are cautiously watching, there are signs that old habits are changing.
Traders are no longer limited to waiting over the weekend; instead, they can start making money by trading or tracking these contracts. As Flow Traders' Tibosch notes, 'If you can have alpha, bring it on.' The future of trading may be headed towards a 24/7 market, and it's time for trading desks to prepare for an around-the-clock market, bidding farewell to the traditional 'weekend effect.'