Equity Perps: A New Era for Stock Trading

In early November, the CFTC, in coordination with the SEC, approved single-stock perpetual futures for trading in the U.S. These derivatives, which have been popular in crypto markets for a decade, allow traders to take leveraged long or short positions without expiration dates. Kalshi became the first CFTC-regulated exchange to launch them, offering perps on over 50 stocks and major indexes. Other players are moving quickly: Intercontinental Exchange (ICE), the parent of the NYSE, has invested in TradeXYZ to bring regulated perps to U.S. traders, and Charles Schwab, already registered with the CFTC and SEC, could easily transition from single-stock futures to perps.

The approval marks a significant shift in the U.S. derivatives landscape. Perps are simpler than options—no strike prices or expiration dates—and use funding fees to tether the contract price to the underlying stock. They also offer leverage, which can amplify gains and losses. The move comes as the Fed has resumed rate hikes, potentially increasing market volatility and demand for active trading tools.

However, the approval has sparked controversy. Wall Street trade groups, including the Capital Markets Alliance Association (CMAA), have sued to block equity perps, arguing that the CFTC overstepped its authority and that these products need stricter investor protections. The legal battle could delay broader adoption by major brokerages.

The introduction of equity perps is a double-edged sword for the brokerage industry. On one hand, it offers a new product to attract active traders, potentially boosting trading volumes and commissions. Firms like Charles Schwab and ICE are well-positioned to capitalize: Schwab already has the regulatory infrastructure and a large retail base, while ICE's investment in TradeXYZ signals its intent to be a key player. Robinhood, despite its crypto perps offering, has not announced plans for single-stock perps, leaving it in a wait-and-see mode.

On the other hand, traditional brokerages like Morgan Stanley's E*Trade are sticking with options, potentially ceding market share to more innovative competitors. The legal challenges from industry groups add uncertainty, but if perps gain traction, they could erode options trading volumes, pressuring firms that rely heavily on options revenue.

For investors, equity perps provide a new way to speculate or hedge with leverage, but they also come with risks. The lack of expiration dates means positions can be held indefinitely, but funding fees can eat into returns. Moreover, the leverage can lead to rapid losses, as positions are automatically liquidated if the stock moves against the trader. This could lead to more volatile trading dynamics in individual stocks, especially those popular among retail traders.