Comment Text:
Perpetual contracts—such as perpetual futures or swaps—are derivatives that let traders speculateon the price of an asset without owning it and without a set expiration date. While these tools are most common in cryptocurrency markets, their structure poses serious issues if introduced into stock markets. The absence of an expiry date, coupled with the use of high leverage, makes them especially susceptible to market manipulation. Traders might exploit these features to influence stock prices artificially by maintaining large positions for extended periods, thereby distorting market signals and interfering with accurate price discovery. These concerns aren’t just theoretical; similar products like Contracts for Difference (CFDs), which also lack expiration and often involve significant leverage, have been prohibited in the U.S. over fears of abuse and manipulation.
Aside from manipulation, perpetual contracts could also add to stock market volatility. Their high leverage means that even slight changes in stock prices can lead to major fluctuations in contract values. This dynamic promotes short-term speculation, which can destabilize the market. Retail investors, attracted by the potential for quick profits and the accessibility of these instruments, face particular risks. Due to their complexity and the possibility of losses exceeding initial investments, perpetual contracts are generally unsuitable for most retail traders. Regulators such as the Financial Conduct Authority (FCA) have flagged similar dangers with CFDs, observing that most retail participants lose money when trading them.
The regulatory landscape presents additional challenges. Many perpetual contracts are traded over-the-counter (OTC), lacking the transparency and oversight of formal exchanges. This lack of visibility hampers regulatory efforts, especially as trading often spans multiple countries with inconsistent rules. The absence of standardized contract terms also makes unified regulation difficult. On a broader scale, the introduction of perpetual contracts into stock markets could bring systemic risks, including liquidity shortfalls or financial contagion, echoing the kind of turmoil seen during the 2008 financial crisis involving derivatives. The interdependence of large, leveraged positions could trigger widespread market disruption.
In summary, perpetual contracts carry serious threats to the stability of stock markets, including the potential for manipulation, increased volatility, and significant losses for retail investors. Their opaque, OTC nature and the complexities of global regulation add to these concerns, while their capacity to spark systemic crises calls for a cautious approach. If stock markets ever adopt these instruments, strong regulatory safeguards must be in place to preserve market stability and protect investors. No more delays—this needs attention now.
