@BrettHarrison

US Compute Futures As Hedges Compute futures face the argument that if a future doesn’t track the exact costs hedgers incur, it will carry too much basis risk to form a viable market. This fundamentally misrepresents how hedges actually function in many major US markets. A hedge does not need to be perfect in order to be useful, let alone transformative, to its underlying commodity market. To be viable as a multi-billion dollar market, a hedging instrument needs to remove enough risk at scale to be worth its initial cost. If the correlation between a hedging instrument and the portfolio is ρ and the optimal hedge ratio is used, the fraction of variance eliminated by the hedge is ρ². A correlation of only 0.7 cuts variance in half. Cross-hedges built on loose relationships predominate in the real US economy. Airlines hedge jet fuel with crude. Bond desks hedge rate risk in credit with treasuries. Long-short equity portfolios hedge market beta with S&P 500 futures. At my former firms Jane Street and Citadel Securities, every trading desk was required to hedge portfolio factors with related instruments intraday and overnight to isolate alpha. Commodity markets are typically heterogeneous. Compute is not a unique underlying in this respect. An “H100 hour” could represent many different goods: SXM or PCIe, spot or reserved, hyperscaler or neocloud, US or Asia. Weigh this “problem” against the “solution” that compute buyers and sellers have today: nothing. Asset-backed loans on GPUs carry 40-50% haircuts because lenders can’t transfer the associated risks. The institutions financing the >$1T datacenter-linked debt sector regularly transact in other heterogeneous commodity markets. The success of US compute futures/options markets primarily depends on CFTC-regulated exchanges’ agility and competency at collaborating with index providers native to chip configurations, neocloud procurement, and timeseries interpolation on a continuous basis. Designing a futures contract that minimizes basis risk and maximizes liquidity formation is an antecedent requirement. Fulfilling the US government mandate to “accelerate the maturation of a healthy financial market for compute” is the main goal.

In the Architect compute markets telegram so far: debate on whether fungibility is necessary for commoditization, nat gas/compute atomic spreads, CDS yields on neocloud stocks, history of power markets, GPU/inference index comparisons, Architect’s near-term plans. DM for access! https://t.co/cdemFyBZYJ

A Guide to the US Financialization of Compute We frequently receive questions about compute trading from neoclouds, GPU-as-a-service providers, data center operators, training and inference companies, energy companies, HFTs, brokerages, investment banks, FCMs, CTAs, RIAs, ETF issuers, VCs, and others. Here's a current summary of the market structure and participants: Three main participants in the US compute derivatives universe: 1. CFTC-regulated derivatives exchanges (DCMs) Definition • Exchanges where CFTC-regulated futures, options on futures, and swaps can be legally traded in the US. • Designs, certifies, and lists derivatives contracts. Engages with third-party index providers for cash-settled derivatives’ underlying settlement prices. • Facilitates capital formation and investment in new US commodity, currency, and energy products. • Responsible for market monitoring, position limits, circuit breakers, recordkeeping, and protection against market manipulation. Participants • American Innovation Exchange: Architect acquired a DCM this year to launch the first AI-industry-dedicated futures exchange in the US. Going live soon with listed compute futures and options, with index data from Compute Desk. • CME: the largest US futures exchange by volume, concentrated in stock indexes, rates, and agriculture. In an exclusive agreement with data provider Silicon Data to list compute futures later this year. • ICE Futures US: the second-largest US futures exchange (run by NYSE's parent), concentrated in energy/power and soft agricultural derivatives. ICE announced intent to list compute futures in an exclusive agreement with data provider Ornn. (pending regulatory review) Role in compute futures/options • Create derivatives contracts that allow commercial compute consumers, compute producers, financial firms, and individuals to hedge and speculate on the price of compute for different GPU types. • Build a broad liquidity profile to create price discovery across the futures expiry curve. • Facilitate sufficient liquidity and volume for the creation and redemption of compute ETFs, currently registered by six ETF issuers. 2. Compute index providers Definition Independent third parties that combine rental price offers and private transactions into single values representing the cost of compute per accelerator. Participants • Compute Desk, Silicon Data, Ornn, SemiAnalysis. • Free aggregators (not formal index calculators): United Compute, AI Multiple, GPU Lease Index, CloudePrice_net, Thunder Compute. Role in compute futures/options • Standardize pricing data across the range of GPU manufacturers, SKUs, configurations, and geographies to build a useful index for hedging by commercial consumers and producers of compute. • Build non-manipulable, IOSCO-compliant benchmarks for use in CFTC-regulated cash-settled futures contracts on DCMs. 3. Spot/forward compute capacity platforms Definition • Marketplaces that match customers seeking short- and long-term capacity with the neoclouds and GPU-as-a-service providers that make delivery. Participants • Nvidia DGX Cloud Lepton, Compute Desk, Compute Exchange, Vast_ai, Andromeda, VoltagePark, HydraHost, RunPod, Ornn, SF Compute, Shadeform, Spheron, Hyperbolic, SaladCloud, Prime Intellect, Clore_ai, Cudo Compute, Akash Network, Digital Ocean, Aethir. Role in compute futures/options • Collect and normalize raw GPU pricing data for index providers. • Aggregate fragmented physical supply/demand and establish compute grades as precursor to development of physically-settled exchange-traded futures. • Create transparency in a market where suppliers may prefer opaque pricing power. ———————————————————— Architect’s thesis is that compute will mature as a US exchange-traded asset class very quickly. We're excited to compete with incumbent exchanges, support index providers, provide ETF liquidity, and partner with capacity platforms to augment our cash-settled futures markets with physical delivery capabilities.

Three months after launching our traditional asset perpetuals exchange, we’d executed $1B in volume. Less than one month later we’re at >$2B, >$1B/month, without offering tokens, an internal market-maker, non-KYC access, crypto perpetuals, or individual trading, yet... https://t.co/XEOOgSli3j

Join Architect's new Telegram group for compute markets. We're bringing together a community of traders/hedgers for futures, options, forwards, and spot compute. DM me or Ishanee for the invite.