Funding Payments and Perpetual Futures Price Convergence
Summary
This discussion examines whether the funding payment on a crypto perpetual futures contract creates a price move that can be arbitraged. The question compares funding with a dividend: if longs pay shorts at a funding timestamp, a trader might short just before the payment, collect it, and close the position afterward. The response says that this trade faces practical frictions, including the small size of funding payments, adverse price movement when shorting into a rising market, trading fees, and slippage.
The discussion offers a practical checklist rather than a theoretical derivation of the contract’s pricing or convergence mechanics. It does not provide empirical data, a strategy test, or a formal calculation of expected returns. It also notes that funding and slippage can both be elevated during volatile markets, so a high quoted rate alone does not establish an exploitable opportunity. Assessing such a trade would require modeling execution costs and price risk for the specific contract and venue.
Key ideas
- Funding arbitrage would attempt to capture a payment by holding a short position across its timestamp.
- Small funding payments may require large positions to produce meaningful gross returns.
- A short position can lose from a price rise that accompanies positive funding.
- Fees and slippage can erase the apparent benefit, especially in volatile conditions.
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Full text
# Convergence of crypto perpetual futures # Convergence of crypto perpetual futures Perpetual contracts are supposed to track the spot prices through the funding mechanism. Typically, if the future has traded above the spot in the last averaging period used to compute the funding, then the funding will be positive, and the long will pay the short exactly at the end of the averaging period. It is enough to only hold the asset at the very end of the period to receive the cash (like dividends on an ex date). I understand that this is to discourage investors to be long the future. But this does not make sense to me from an arbitrage perspective. Indeed, to prevent the following arbitrage around the funding payment: - shorting the future just before the funding payment, - taking the funding (almost precisely known due to the averaging period), - buying back the future, it is required that the price of the perpetual moves UP (opposite direction to the convergence since we supposed perp>spot) by the amount of the funding. Same phenomenon with dividends: the spots decrease by the value of the dividends when going through the ex-date. So that's my point: the required price correction that should arise from this payment is opposite to what I was expecting. It looks to me that it should create a divergence in price. Obviously it's not the case, but what am I missing? ## Answer by quantinho (score 4) https://quant.stackexchange.com/a/71718 In theory there seems to be an arbitrage. But in practice if you want to build a model to benefit from it, you should take into account the following factors: - The rate is small so your position size should be relatively large - A positive funding rate means the price is going up, but you are taking a short position which is opposite to the market. The price is already moving against your position. - Fees - Slippage Funding rates are high during the volatile markets, but so is slippage.
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