Walking the perp walk

Retail traders love trading so much that they’ve started looking for ways to invest even when the market is closed. They’re especially eager to take advantage of recent oil market volatility, desperate to bet on the wild ebb and flow of crude prices in recent weeks.

They found a solution. It’s weird.

JPMorgan reports that retail traders are turning to perpetual futures—or perps, as the cool kids on Wall Street call them—in growing numbers. To do so, they’re using decentralized exchanges like Hyperliquid, where cryptocurrencies such as bitcoin and ethereum are usually the assets of choice for speculative trading. But since the war with Iran began, oil perps have gained popularity among traders who want to bet on the market at all hours of the day.

Say that again, but slower

Perps are specialized derivatives that let traders speculate on an underlying asset without actually owning it (meaning you can bet on the future price of oil without needing somewhere to store all the barrels). But unlike traditional futures contracts that have specific expiration dates, perpetual futures can be held indefinitely so long as you can maintain the necessary collateral—making them a great way to speculate on the volatile price movements of crude without having to buy and sell new contracts as they expire.

Most importantly, you can trade perps 24/7, giving investors a chance to roll the dice at all hours of the day. And by using leverage, even traders with a small principal can realize outsized profits—or watch their money evaporate at the drop of a hat.

If that all sounds overly complicated and risky, it is—so much so that regulators restrict retail traders from using perps in the US. But investors have found a workaround thanks to the magic of cryptocurrency, which allows anyone to trade perps on decentralized exchanges like Hyperliquid that are based outside of the country.

By the way, perps aren’t the only way retail investors are playing the oil trade. Retail inflows have poured into pure-play oil ETFs ever since the war in Iran began, with everyday traders trying to capitalize on the headline-driven oil market.

Ready or not, change is coming

Perps are still a small part of the financial ecosystem, but that ecosystem is quickly evolving, and perpetual futures may soon play a growing role.

Earlier today, Coinbase announced the debut of stock perps on its platform, giving investors the ability to trade a select group of stocks and ETFs around the clock. Nasdaq has partnered with crypto exchange Kraken to tokenize stocks for 24/7 trading, and the SEC just gave them the green light to test it out. The NYSE, CME Group, and Cboe Global Markets are experimenting with the idea as well.

For now, perps are a peculiarity that are popular with a small subset of risk-loving retail traders. But retail traders remain a powerful force in markets today, and as demand for perps continues to grow, expect to hear more about them in the near future.—MR