Perpetual Futures: The Missing Link in Tokenized Equities

Overview:

• Perpetual Futures (PERPs) allow for continuous trading without expiry, using funding rates to keep prices aligned with spot markets.
• Crypto derivatives dominate trading volumes, with PERPs representing about 75% of the market.
• Most activity occurs offshore, and some decentralized exchanges already offer PERPs on U.S. stocks with high leverage.
• PERPs differ from traditional futures by relying on ongoing funding incentives rather than final settlement. This structure can lead to liquidity risks and market instability, especially during periods of extreme leverage or volatility.
• Global retail participation in U.S. equities is rising, driven by 24-hour trading and high-risk appetite in regions like South Korea and India.
• Regulatory attention is increasing, with the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) considering rulemaking for PERPs and tokenized stocks.

Building on our Deep Dive into Tokenized Equities, there is one major part of the tokenized landscape that is often overlooked in the equity implementation discussion: perpetual futures ("PERPs").

Many crypto advocates have stated that tokenization will become the standard for accessing U.S. stocks outside the U.S., with most major markets establishing tokenization frameworks within five years. While that may be ambitious, understanding how crypto markets trade today provides insight into where equities could be heading.

Currently if you look at crypto volumes, derivatives represent roughly 75 percent of the overall crypto market, with more than 90 percent of that activity taking place offshore.

These developments come as the president has pardoned different crypto executives, setting up decentralized platforms to renter the U.S. market. Some decentralized exchanges already offer perpetual futures on U.S. stocks and indexes with leverage up to 50x. Globally, investors can access PERPs with leverage as high as 500x. With most crypto trading now occurring through these instruments opposed to the underlying tokens, if stocks become crypto, understanding how PERPs work is essential.

What is a PERP?

A perpetual future is a futures contract that never expires. Instead of requiring position rollovers, PERPs use a funding rate mechanism, typically settled every eight hours, to keep prices in line with the spot market. When the PERP trades above spot, long holders pay short holders; when it trades below, shorts pay longs. This dynamic encourages arbitrageurs to take the opposite side and helps stabilize prices.

Unlike traditional futures that converge to spot expiry, PERPs rely on continuous funding incentives rather than a final settlement. Their payoff structure is therefore closer to a swap, where value is exchanged continuously instead of at a single maturity date.

Large trading venues can internally net long and short PERP positions much like swaps. However, as seen following recent comments by Trump about China with the Crypto blowup, extreme leverage can quickly destabilize the system. If one side of the market is wiped out, risk becomes unbalanced and liquidity thins, leading PERPs to malfunction.

Liquidity Dynamics and Market Risks

PERPs dominate crypto trading volumes and typically show far greater liquidity than the underlying spot market. For example, when looking at the largest crypto exchanges, Bitcoin PERPs regularly trade multiples of their spot Bitcoin volume. Exchanges support the product with real-time margining, automated liquidations and insurance funds, adjusting margin levels based on volatility, position size and market conditions.

This structure, however, brings distinct risks. There is no guaranteed price convergence, and unexpected widening of spreads can lead to significant losses. Around-the-clock trading also introduces challenges such as continuous margin calls and liquidity stress during off-peak hours.

Global Retail Flows and 24-Hour Trading

Retail participation in U.S. equities has increased by roughly one-third since the original meme-stock surge, now representing more than 20% of market activity. With 24/5 trading scheduled for launch next year and full 24/7 access likely to follow, global retail participation in U.S. stocks is expected to expand further.

As my colleague James Baugh has noted, and will detail further in an upcoming piece, European retail participation remains under 10%. While growing, Asia is the much bigger driver. South Korea currently accounts for about 40% of overnight U.S. trading despite restrictions following overnight canceled trades last year. Regulators are set to lift that ban next month, likely driving a major increase in overnight volumes.

In regions where gambling is restricted like many Asian countries, leveraged trading in U.S. markets and crypto serves as an outlet. Recent reports highlight that South Korean retail investors represent more than 40% of trades in leveraged ETFs, showing a high tolerance for risk. These ETFs are some of the most liquid instruments, with volumes readily trading past funds that track U.S. markets. In India, derivatives activity already overshadows cash equities.

As trading begins to follow the sun, it is easy to imagine global retail investors turning to PERPs tied to well-known U.S. large-cap stocks. Given their 24-hour nature, auto-liquidation mechanisms and high leverage, these instruments can amplify volatility across both derivative and spot markets when news hits exactly what was observed following Trump’s China-related comments.

Adoption Potential

Earlier this year, the CFTC issued a request for comment on integrating PERPs into regulated U.S. derivatives markets. The topic also featured prominently in the joint SEC-CFTC roundtable in September. This month, SEC Chair Atkins said he views PERPs as an innovative product that should be incorporated into U.S. markets at National Securities trading Association conference. With rulemaking around tokenized stocks and PERPs expected sometime next year, attention is shifting toward how these structures could affect underlying equities.

Historically, margin exposure has been a catalyst in nearly every major market dislocation. Retail investors now represent around 20 percent of daily U.S. equity volume, and in meme stocks, their share can reach 60% to 90%. This level of participation and liquidity cannot be ignored. If tokenized stocks and PERPs become the preferred retail trading vehicles, institutional players will ultimately need to participate as well. We just hope as decentralized and traditional finance continues to blend, the SEC will step in to curtail this undue risk before it leads to another major dislocation.