Written by:Eren,Four Pillars
Compiled by:AididiaoJP,Foresight News
After the ADR listing on Nasdaq, the price gap between the ADR (SKHY) and the underlying shares (SKHX) widened significantly. During this period, TradeXYZ, a HIP-3 builder on Hyperliquid, launched perpetual futures markets for both. The funding rates of these two markets clearly demonstrate what stock perpetual futures actually provide, what the market still lacks, how they interact with the underlying spot markets, and where they attract the strongest demand.
Note: ADR (American Depositary Receipt) is a certificate issued by a U.S. bank representing shares of a foreign company, facilitating trading in U.S. dollars for American investors on markets like Nasdaq. ADR (SKHY) is the ticker for SK hynix's ADR listed on Nasdaq, with each SKHY representing 1/10th of an underlying share (SKHX); the underlying shares (SKHX) are the original shares/traded product in the Korean domestic market. After listing, due to strong U.S. investor demand, liquidity differences, and limited arbitrage channels, the price gap between SKHY and the underlying shares expanded noticeably.
1. SK Hynix ADR Premium and Thwarted Arbitrage
On July 9, SK hynix sold 177.9 million American Depositary Receipts (ADRs) at $149 each, raising $26.5 billion. This is the largest ADR issuance ever by a foreign company, surpassing Alibaba's $21.8 billion record in 2014. The order book was oversubscribed over 7 times, with Nasdaq opening at $170 on July 10.
Subsequently, the price gap between the ADR (SKHY) and the underlying shares (SKHX) widened dramatically. The premium timeline is as follows:
- July 13: The ADR premium relative to the issue price, around 3%, expanded to 25.6%, while the underlying shares plunged 15.4%. The KOSPI index also fell over 8% intraday, triggering a circuit breaker, but the ADR only declined 9.3%.
- July 14: The ADR surged 27%, closing at $193.92, with its premium over the underlying shares skyrocketing to 51%.
- July 15: The previously surging ADR fell 9%, closing at $176.46, while the underlying shares rebounded 8.8%. The ADR premium over the underlying shares narrowed from 51% to 30.7%.
The cause of the premium is the closed arbitrage channel. In an efficient market, institutions would buy the cheaper underlying shares, convert them into ADRs, and sell the ADRs to increase supply and eliminate the spread.
However, this channel is currently not open. These ADRs were not created by depositing existing shares; instead, they were created by issuing 17.79 million new shares to the depositary bank (Citibank). These underlying shares are scheduled for additional listing on the Korean Exchange on July 29. The Korea Securities Depository stated that applications for interconversion between underlying shares and ADRs will only be possible after that date.
Furthermore, the issued ADRs account for less than 3% of SK hynix's total shares. Strong U.S. institutional demand encountered inelastic supply, causing the spread to widen.
2. HIP-3 Funding Rates Reveal the Current Stage of Stock Perpetual Futures
During the same period, TradeXYZ, a HIP-3 builder on Hyperliquid, launched perpetual futures markets for both. SKHX, tracking the underlying shares, has been operational for some time, while SKHY, tracking the ADR, went live the day before listing as a pre-IPO contract, transitioning to a standard contract upon Nasdaq trading commencement.
As the gap between underlying shares and ADRs widened, the funding rates of the two markets diverged in opposite directions. On the 13th, while the underlying shares plummeted, the SKHX funding rate jumped to +0.10% per hour, while SKHY's rate dropped to -0.065%.
A positive funding rate means longs pay shorts, a negative rate means the opposite. This indicates longs simultaneously rushing to the underlying share side, and shorts rushing to the ADR side. This combination points to a single position – a trade betting on premium convergence executed on Hyperliquid.
This event validates several hypotheses about stock perpetual futures through a single case study. It directly demonstrates what stock perpetual futures actually provide, what the current market lacks, their relationship with the underlying market, and which markets give them the strongest demand:
- Ability to Express Views Bypassing Spot Market Frictions: Betting on premium convergence requires buying underlying shares and shorting ADRs. In the spot market, this requires Korean Won funds, foreign investor accounts, settlement infrastructure, and ADR borrowing availability. With perpetual futures, it can be achieved by simply trading two contracts on a single platform using USDC as collateral.
- Lack of Instruments to Separate Funding Rate Exposure: The current structure of the two-sided bet is not ideal. Even if the premium persists, the hourly funding rate accumulates, eroding collateral. In spot arbitrage, once underlying shares are converted to ADRs, the spread is immediately locked in as realized profit, but perpetual futures lack this forced convergence mechanism. SKHX converges to the underlying share index, SKHY converges to the ADR index; neither can close the gap between the two indices. Perpetual futures reflect the spread in the underlying markets but do not resolve it. Even with correct direction, delayed convergence can allow accumulating holding costs to erode returns. Ultimately, it is a structure that simultaneously carries both the "premium will converge" view and its holding cost.
- A separate market is needed to trade the funding rate itself and decouple the two. For example, Pendle's Boros tokenizes funding rates into YU (Yield Units), splitting them into fixed and variable components. A position paying funding rates, like an SKHX long, could hedge the cost by buying the floating-rate receiving YU on Boros. This allows hedging variable costs into fixed costs. The cost itself doesn't disappear, but future expenses can be locked in at entry, enabling position sizing management. However, Boros currently supports only major assets like BTC and ETH, not yet HIP-3 stock perpetual futures. Therefore, trading this spread currently means bearing the volatility of funding costs.
- Perpetual Futures as a Leading Indicator: TradeXYZ's SKHY pre-IPO market pointed to $164 three hours before Nasdaq open, $169.80 one hour before, $169.92 one minute before, with the actual opening price being $170. The SKHX market also trades during KRX night and weekend closures, with Korean traders using its price as a leading indicator for the next day's open. Perpetual futures are no longer confined to their derivative role of tracking underlying assets; they become price discovery venues when the original markets are closed.
- Market Value Inversely Proportional to Underlying Asset Accessibility: These are two futures contracts linked to the same company, but SKHY's funding rate stayed near zero most of the time except during periods like the sharp spread widening on the 13th. The reason is that physical ADRs exist on Nasdaq, and from the 14th, U.S. options are also listed, allowing arbitrageurs to capture the basis. In contrast, SKHX lacks hedging tools, making the funding rate the sole mechanism to clear the market. Consequently, it has become the single largest contract, dominating 33% of total HIP-3 volume and 50% of stock perpetual futures volume. Launching perpetual futures for highly liquid large-cap U.S. stocks is like rebuilding what already exists. The more restricted the access, the higher the value of the perpetual futures contract.
A key future date to watch is July 29. When the underlying shares are additionally listed on the Korean Exchange and applications for interconversion between underlying shares and ADRs open, the blocked arbitrage channel will partially reopen.
However, asymmetry persists even after the channel opens. Redeeming ADRs into underlying shares has no limit, but converting underlying shares into ADRs is only possible within the issuance cap, and compressing the premium requires the latter.
Because of this, it remains uncertain whether the premium will sharply converge, but even if it does, Hyperliquid remains the only place where this spread can be traded.
