So far: A perpetual never expires. Funding between longs and shorts pulls its price toward an index, and when a crowd has borrowed the same way, one forced sale can set off the next (lesson 7).
The same contract works for things that aren't crypto. A stock perpetual is a perpetual whose index follows a company's share price: a Tesla perpetual pays as if you held Tesla shares. You never own a share, and you trade it on a crypto venue at any hour, on any day of the week.
The shares themselves trade on Nasdaq, whose market hours are 9:30 to 16:00 New York time, with its systems open from 4:00 to 20:00 for trading before and after (Nasdaq's hours). At weekends nobody trades them there at all, and the perpetual keeps going.
The weekend
So over a weekend the perpetual has nothing live to follow. If news about the company breaks on Saturday, the shares can't react until Monday, but the perpetual can. The people trading it have to work out the new price among themselves.
Here is a toy weekend for a stock that closed at 200 on Friday. Pick what happens, then run it from Friday's close to Monday's open, and watch the gap between the perpetual and the stock's last price.
Pick a weekend and run it from Friday's close to Monday's open. Watch the gap between the perpetual and the stock's last price.
Friday, 16:00 in New York. The stock has just closed at 200. The perpetual is still trading.
On a quiet weekend the perpetual drifts and the gap stays under half a percent. With good news on Saturday it jumps about 6% and stays up; on Monday the stock opens at 211.20, close to where the perpetual spent Sunday, and the gap closes. With a rumour that is denied on Sunday, the perpetual drops 6.8% and climbs most of the way back, so anyone who sold in a hurry on Saturday sold at a price the stock never traded at.
In this toy the weekend's gap was news the stock hadn't been able to price yet, and the perpetual got there first. It doesn't have to be that way. With fewer people trading, a handful of orders can push the price around (lesson 6), and Monday's open is the first time the weekend's price is checked against the shares.
That leaves the venue with a problem. Funding pulls a perpetual toward its index, and an index built from the stock's price sits still all weekend. Each venue settles this its own way, and a contract's specification says what its index does while the stock's market is closed. The figure tries two simple choices on the good-news weekend: watch the perpetual, the index, and the funding a long pays.
Switch how the index is kept while the stock is shut. Watch the basis, and what a long pays in funding.
- Widest basis
- +6.2%
- A $10,000 long pays
- $300
- Index at 9:00 Monday
- 200.00
- Stock opens at
- 211.20
The basis is the whole weekend move, so funding hits its cap and the longs pay it every eight hours for a price everyone knows is out of date. At Monday's open the index jumps to where the perpetual already was.
If the index holds Friday's close, the basis is the whole weekend move, and in this toy a long holding $10,000 pays $300 in funding for a price everyone knows is out of date. If the index follows the venue's own trading, the basis stays small and so does funding, but nothing outside the venue checks the price until Monday. Either way, a stock perpetual's basis on a Saturday means something different from its basis on a Tuesday.
The maths
With the perpetual at F and the stock's last price at S:
gap = F / S − 1
Against an index I, the same sum is the basis as a share of the index, and the toy's funding rate for a period, capped at 0.5%:
r = min(0.5%, max(−0.5%, F / I − 1))
Who is around
In this toy, fewer market makers quote at the weekend, and the ones who do have a harder job. A market maker who sells you the perpetual on a Tuesday afternoon can buy the shares on Nasdaq a moment later and be back to holding nothing. On a Saturday they can't, so they carry the risk until Monday. They quote less, and further from the mid (lesson 2).
Below is the same toy perpetual's book on a Wednesday afternoon and on a Saturday. Choose how much you want to buy straight away, and see what it costs over the mid.
Switch between a Wednesday afternoon and a Saturday, and change how much you buy. Watch the spread, and how far up the book your order reaches.
- Spread
- 1 bps
- Depth, 5 levels a side
- $450k
- Your cost over the mid
- 0.5 bps
- Ask levels used
- 1
Your $25,000 fits inside the best ask, so you pay half the spread over the mid and nothing more.
On Wednesday, $25,000 fits inside the best ask and costs 0.5 basis points over the mid. On Saturday the spread is ten times wider, and the same order walks four levels up the book (lesson 5) for 11.6 basis points. Nothing about the contract changed, only who was around to trade it.
The maths
Buying D dollars across ask levels at prices ak, taking dk dollars at each, with the mid at m:
average price = D / Σ (d_k / a_k)
cost over the mid in bps = (average − m) / m × 10,000
In real data
What you learned
- Stock perpetual
- A perpetual whose index follows a share price. It trades on a crypto venue at any hour, weekends included.
- Weekend gap
- While the stock's market is shut, the perpetual moves and the stock's last price doesn't. The gap is the venue's guess at what the stock is worth now.
- Monday's open
- The first time the weekend's price is checked against the shares themselves.
- The index while shut
- Each venue decides what its index does while the stock can't trade, and the contract's specification says how. Basis and funding depend on it.
- Spread and depth
- Thinner when fewer people are around and market makers can't hedge in the stock, so trading straight away costs more.
Check yourself
1. A stock closed at 200 on Friday. On Saturday its perpetual trades at 212. What is the gap?
2. In this lesson's toy, why is the spread wider on Saturday?
3. A venue's index holds Friday's close all weekend, and the perpetual rises 6% on Saturday. Who pays funding?