Perpetual Futures: Wall Street's Existential Challenge and Evolving Landscape

A common adage among traders advises against taking positions that disrupt one's peace of mind. In contrast, perpetual futures, often referred to as 'perps,' are designed precisely for this continuous engagement.

These blockchain-based, continuously traded, and never-expiring contracts, a classification currently under legal scrutiny by the Chicago Mercantile Exchange (CME), are experiencing such rapid growth internationally that they nearly overshadowed the largest IPO on record and significantly impacted the market valuations of major exchanges like CME Group, Cboe Global Markets, Intercontinental Exchange, and Miami International Holdings.

Following recent statements from President Trump hinting at a regulatory path for Hyperliquid, a rapidly expanding decentralized platform for trading perpetual futures, Wall Street may need to shift from opposition to integration.

At their core, perpetuals can be understood as bets with no expiration date. They are adaptable to virtually any asset class, trade around the clock, and offer substantial leverage.

Traditional exchanges are concerned that perpetuals could undermine their business model, which relies heavily on revenue generated from the 'roll' in derivatives. This process involves traders extending expiring contracts by selling a near-term contract to buy a longer-term one. Since perpetuals do not expire, this revenue stream is negated. While U.S. approval for perpetual futures has so far been limited to cryptocurrencies, recent presidential remarks suggest that regulated trading of perpetuals may soon extend to popular traditional assets like stocks and commodities, which have seen a surge in popularity on Hyperliquid this year.

"The economic models of traditional exchanges could be called into question," stated a current board member of a publicly traded exchange who wished to remain anonymous. "Perpetual futures, the expansion of zero-day-to-expiration options, and extended trading hours are all responses to an increasingly competitive market where investors expect continuous access."

Brokers and exchanges have been extending trading hours for years. TD Ameritrade, a Charles Schwab company, pioneered '24/5' trading in 2018, with the London Stock Exchange set to follow suit next year. Currently, most brokers, along with Cboe, offer trading in major securities, including index options, on all days except Saturdays and Sundays. The introduction of monthly, then weekly, and eventually same-day options expirations has also effectively expanded the trading calendar. In this context, perpetual futures, originating from the cryptocurrency space—an asset class whose appeal was largely driven by constant accessibility—appear to be a natural progression.

However, some investors and observers express concerns regarding the product's inherent leverage.

While platforms like the prediction marketplace Kalshi and centralized crypto exchanges such as Coinbase and Binance brought attention to this asset class, it is the decentralized platform Hyperliquid that currently dominates the field. Hyperliquid, a trading-settlement blockchain, in conjunction with marketplace operator Trade[XYZ], forms HyperliquidXYZ, a global decentralized exchange that has become synonymous with perpetual trading. Last month alone, it facilitated nearly $200 billion in notional volume, according to data compiled by executives at Hyperliquid Strategies (PURR), a publicly traded treasury company investing in tokens that underpin the exchange blockchain.

Wall Street Adoption?

In March, Trade[XYZ] secured an exclusive license from S&P Dow Jones Indices to trade perpetual derivatives on its benchmark stock index, the S&P 500. In May, the Commodity Futures Trading Commission's (CFTC) approval of perpetual futures for Bitcoin made Kalshi the first regulated domestic operator to offer perps, a development that caused shares of incumbent exchanges to decline.

Although primarily favored by retail investors, perpetuals are beginning to attract increased interest from institutional investors.

"While this is a product heavily centered on retail investors, there is already some institutional activity," commented Ram Vittal, CEO of market-maker Marex Group, whose shares have risen over 80% this year. Marex offers perpetual futures on various underlying assets globally and has started issuing crypto perps in London. "Marex is pleased to expand that offering to U.S. regulated venues, regardless of the underlying asset, to support client needs," Vittal added.

Hyperliquid's perpetual futures exchange represents one of the most compelling applications of blockchain technology to date. The platform's activity is driven by HYPE, a cryptocurrency token whose value is partly derived from transaction fees. HYPE has increased by 196% this year and is a significant holding in S&P's new Pantera Digital Asset Index, which tracks revenue-generating crypto projects.

Given Hyperliquid's success, averaging $9.6 billion in daily perpetual notional volume in June, many major incumbent players are already preparing for related derivative trading styles. Robinhood Markets provides crypto perpetuals to European customers, and Cboe launched 120-month-expiry 'continuous futures' late last year.

Even CME CEO and Chairman Terry Duffy, a prominent critic of perpetuals, indicated on the company's latest earnings call that CME has "contract specifications and is prepared to bring these products to market should evolving demand or structural shifts make it appropriate to do so."

"However, we have not heard demand from our customers for these products," he added.

The decline in exchange stocks has left executives in Chicago and New York puzzled, according to both on and off-the-record discussions. This is particularly true for Cboe, where options are typically associated with risk management rather than risk-taking, and expiration is a key feature—not a flaw—allowing investors of all sizes to define their risk. Even in the zero-day-to-expiration market, over 90% of trades involve capped risk, as per exchange data.

"Perps as a replacement to options is where it breaks down for me," stated Rob Hocking, Cboe's global head of derivatives, in an interview. "Zero-day-to-expiration options offer asymmetric payouts that can be infinite, and almost always, the most a customer can lose is their option premium."

This sentiment is shared by tech-derivatives leader Nasdaq. For both Nasdaq and ICE, the owner of the NYSE, perpetual futures present a different challenge: how will their IPO and listing businesses evolve in an environment where private companies can now find significant liquidity and price discovery online?

Hyperliquid's perpetual futures have garnered significant attention by various metrics, especially leading up to SpaceX's IPO. On the day of the listing, over 7 million SpaceX perpetuals, valued at $1.2 billion, traded on Hyperliquid, with SpaceX perpetuals eventually trading very close to the initial stock price of $150. Trading in stock perpetuals like SpaceX and SK Hynix has surged this year, with TradeXYZ volume reaching nearly $500 billion due to the popularity of 'real-world' assets, according to Patrick Moley, a senior research analyst at Piper Sandler.

"Some of the appeal of perps is their 24/7 nature," noted Stephen O'Connor, vice president of U.S. options analytics and product innovation at Nasdaq. "However, to achieve true price discovery, you need the liquidity that our listed markets provide."

CME Fighting Perps

The extent to which perpetuals infiltrate existing market structures hinges first on how they are classified. CME's Duffy sued the CFTC in June over its approval of Bitcoin perps on Kalshi, arguing that the instrument should be categorized as swaps, not futures.

"We are not taking this lightly," Duffy stated on CNBC shortly before filing the lawsuit.

This legal battle is crucial for the asset class, as swaps and futures have vastly different regulatory implications regarding the capital institutions trading them must hold for margin, risk, and tax purposes. The CFTC has dismissed the suit as "frivolous."

There are also significant implications for the exchange-traded fund (ETF) industry, where issuers have been utilizing the swaps market for customized products that fuel the rapid growth of leveraged ETFs. If ETF issuers can instead use perps, it could reduce their costs and impact revenues for swap dealers, which are predominantly banks.

The Commodity Exchange Act of 1936 defines futures contracts as "contracts of sale of a commodity for future delivery," ostensibly contrasting with some defining characteristics of perpetuals, such as their non-expiring nature or the absence of physical delivery of an underlying asset. The Dodd-Frank Act of 2010 distinguishes between the two, stipulating that an instrument defined as a future cannot be a swap. Therefore, if perps were classified as swaps, it would impose significantly more stringent capital requirements on platforms like Kalshi and Polymarket, which operate their own clearinghouses.

"We disagree with that characterization [as swaps]," stated Diana Elisabeth, head of communications for Kalshi, via email. "CME's lawsuit is not about the law; it's about the fear of competition. With perps, you pay fees once and can exit the position whenever you choose. The end result is a more affordable, simpler product for the end consumer."

The CFTC declined to comment on the litigation.

Significant Volume So Far

Regardless of whether they are classified as futures or swaps, one thing is evident: perpetuals have a substantial following that is keeping Wall Street on high alert. Kalshi traded over $20 billion in perpetuals within its first month of operation and has filed for perps on gold, silver, and platinum, with more products anticipated.

The total notional volume of perpetuals across both centralized and decentralized exchanges has averaged around $150 billion per day this year, down from a peak of nearly $200 billion per day last year, according to data compiled by CNBC. While direct comparisons between perp volumes and traditional futures or options markets are challenging due to the lack of standard contract sizing for perps, options trading on the S&P 500 Index typically ranges between $2-3 trillion in notional value on any given day.

Gross protocol revenue on the Hyperliquid platform peaked at $357 million last year, falling to $200 million as of the last quarter. This decline is attributed to builders on the blockchain launching new markets and capturing a larger share of revenues, according to data analyzed by CoinDesk. Cboe reported revenue exceeding $700 million last quarter, a 25% increase year-over-year.

One potential outcome appears to be a form of hybridization between incumbent exchanges and crypto exchanges that offer perpetuals.

In March, ICE, the owner of the NYSE, announced a $200 million investment in the international crypto exchange OKX, valuing the business at $25 billion. This partnership, structured as a 50-50 joint venture called OKXICE, aims to launch tokenized equities and crypto futures. OKX currently offers stock perpetuals, described as 'swaps,' on Mag-7 stocks.

Similarly, Deutsche Börse Group, the owner of Eurex, entered into a partnership with crypto exchange Kraken last year and expanded its relationship with a $200 million stake in Kraken's operator, Payward. Kraken offers perpetuals on various products with leverage up to 50x.

"This is likely the most exciting period in the futures industry since the inception of financial contracts in the 1970s," stated a senior executive at a major futures clearinghouse who requested anonymity due to the potential perception of regulators. "Competition drives innovation, leading to new products and lower prices, and the CFTC is attempting to accommodate these disruptors. Definitions should be clear, and some of these developments may currently be pushing the boundaries."