…
Perpetual futures or “perps” already dominate cryptocurrency trading, potentially offering leverage of 100 times. That means huge swings and the potential for a 1% move to liquidate a trader’s position. The counterparties are someone else, not a mutualized exchange, and perps never expire. Not being tied to a set date means they technically aren’t even “futures.”
Now, firms offering perps want them available in the U.S. for commodities and stocks…
CME Group is the granddaddy of derivatives exchanges. Its recent launch of single-stock futures on 50 of the biggest U.S. companies is in part aimed at retail investors who’ve flocked to those other risky offerings. The futures trade 23 hours a day. They offer a simpler way to bet on stocks using leverage—much more than what’s available with margin debt, but less than the most speculative options… [end quote]
From Gemini (a short excerpt)
Because trades are not backed by a central, regulated clearing house with mutualized risk pools, traders take on direct credit and solvency risk of the platform or liquidity provider facilitating the derivative.
Amplified Market Volatility (“Stock Blowups”)
- Mass liquidation events on highly leveraged perps can create feedback loops. As cascading liquidations force automatic selling or buying in large volumes, it can spill over into the underlying spot stocks or commodities, causing sudden price crashes or squeezes.
Funding Rate & Horizon Risk
- No Expiration Date: Standard futures expire and converge to the underlying spot price on a set date. Perps never expire, meaning they rely on periodic payments (funding rates) between long and short traders to keep the perp price tethered to the spot market price. Holding a position long-term can become unpredictably expensive if funding rates spike against you. [end Gemini]
The process of setting and arbitraging price on a perpetual derivative that (unlike regular options) goes on indefinitely and doesn’t have a closing date is complicated.
Anyone who wants to try these should research them in depth. They sound very risky to me. I wouldn’t touch one with a 10 foot pole. Then again, I’m a risk-averse little old lady.
Wendy