Perps for the People
Institutions have been trading perps long before crypto existed - through swaps.
In fact, you might own swaps yourself - many ETFs are just a wrapper for them, instead of the underlying basket of stocks (“synthetic replication”).
The market for swaps is mind-bogglingly massive, but its off-exchange nature has many problems:
Heightened Counterparty Risk
Fragmented Liquidity
Uncompetitive Pricing
Crypto markets solved these problems years ago with perpetual futures. Let’s examine how perps on traditional assets revolutionize finance for both institutions and retail.
Sounds Complex?
Over the Counter (“OTC”) markets involve bilateral trading between two parties, under their own custom legal framework.
A hedge fund seeking leveraged exposure to AAPL 0.00%↑ negotiates all terms directly with its bank: leverage ratios, funding rates, margin requirements, and settlement procedures.
Sounds complex? It usually is.
The International Swaps and Derivatives Association tried to standardize the paperwork via the ISDA Master Agreement, but in reality, the cost and work required to trade swaps leave it out of the reach of all but the biggest financial institutions.
Perps democratize this key institutional investing strategy with a common contract spec, tradeable on an exchange.
House of Cards
Remember 2008 and the GFC? When Lehman Brothers collapsed, it didn't just hurt Lehman's direct counterparties. It created a cascade of failures because everyone was connected through bilateral derivatives contracts.
Here's what actually happened: Bank A had swaps with Lehman. Bank B had swaps with Bank A. Bank C had swaps with Bank B. When Lehman failed, Bank A couldn't pay Bank B, so Bank B couldn't pay Bank C. The whole system was one giant house of cards.
Central clearing de-risks everything.
With futures (including perps), everyone trades against a central counterparty through a process called novation.
When someone fails, credit risk then gets socialized between the pool of traders, and the CCP’s (Central Clearing Counterparty, not China) guarantee fund covers the loss and the system keeps functioning.
This is similar to what crypto exchanges do with their “insurance fund”.
CCPs also allow you to offset positions against counterparties. If you are cleared by a CCP and you buy AAPL from Bank A then sell it to Bank B, you end up with no position (because both trades face the CCP, and so cancel out). Bilaterally, you’d have two positions: one long, and one short.
The result is an 80-90% reduction in gross exposures. Lower exposure means less capital required, which in turn means lower costs. Lower costs mean better prices for everyone (apart from the banks making money by ripping off customers bilaterally).
There was a regulatory push to increase CCP usage after the GFC, including in the Dodd-Frank Act; nowadays, approximately 75% of OTC derivatives are cleared. However, that still leaves trillions of dollars of uncleared OTC risk globally, stacking up, waiting to topple.
Shadow Pricing
When you trade an equity swap with JPMorgan, here's what happens:
You: “What’s your price for 10x leveraged exposure to TSLA?”
JPMorgan: “3.2% funding rate, 50 basis points spread.”
You: “Is that competitive?”
JPMorgan: “trust us - it is.”
The only way of checking is to go ask a second market maker, and then a third.
Exchange-traded perpetual futures flip this completely. Every quote is visible - you can literally sit and watch the order book (which I’d recommend - it’s hypnotic). Every trade is reported.
Transparency is everything.
OTC derivatives lead to another pricing issue: they’re "customized". This sounds great - until you realize what it actually means. No two contracts are identical, so you can't trade them efficiently.
Exchange-traded derivatives are the opposite: identical contracts for everyone create fungibility that enables efficient trading.
"Customization" is a great feature when you're buying a suit. When you're trading derivatives, it’s a bug.
Liquidity Begets Liquidity
Trading volumes mean opportunity for market makers, who add liquidity. This creates a virtuous cycle as ever more customers come to trade on the most liquid venues. The more trading that happens in one venue, the tighter the spreads and deeper the order book becomes as market makers jostle for position.
Exchanges concentrate liquidity in a single venue. All trading interest pools together, creating deeper markets and better execution for everyone.
Meanwhile, OTC markets fragment liquidity across thousands of bilateral relationships. Each dealer-customer relationship is essentially a separate market. There's no network effect, because there's no network.
It's like shopping at a farmers’ market vs Costco. Who has time to haggle over every artisanal loaf or heritage cucumber with individual vendors? Costco, meanwhile, has already done the heavy lifting of bringing buyers and sellers together in one place. 🌭
The Betfair of the CFD world
For retail, CFDs (contracts for difference) have existed in traditional markets for decades, allowing traders to speculate on price movements without owning the underlying asset. But they've always been traded bilaterally with brokers - the same OTC structure that creates all the problems we've discussed above.
Perps enable open-ended exposure to underlying assets, just like CFDs (check out my company QFEX). However, they operate through a standardized contract format that trades continuously on exchanges, regardless of time horizon, leverage amount, or position size.
They take the economic function of CFDs and move them onto exchanges - like Kalshi does to Draftkings, and Betfair does to William Hill.
Imagine a world where every CFD provider was competing for your business on the same platform. That’s what a perp exchange looks like. Traditional CFD providers hate this because it eliminates their ability to charge massive spreads and customize terms in their favor.
Let There Be Light
OTC derivatives were designed for a shadowy world of bilateral relationships and hand shakes behind closed doors.
Exchange infrastructure was designed for electronic trading, automated risk management and clearing, and maximum liquidity concentration.
The result is markets that are more liquid, more transparent, and more efficient than their OTC equivalents. For traders, this means better execution, lower costs, and reduced risk. For the financial system, it means greater stability and resilience.