HIP-3 Perpetual Futures Arbitrage Practice: SK Hynix ADR Premium Trading Opportunity
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HIP-3 Perpetual Futures Arbitrage Practice: SK Hynix ADR Premium Trading Opportunity
From 25% to 51% Premium: How HIP-3 Makes SKHX/SKHY the Best Trading Tool for Cross-Border Equity Spreads.
Navigating Web3 tides with focused insightsWritten by: Eren, Four Pillars
Compiled by: AididiaoJP, Foresight News
Following the listing of the ADR on NASDAQ, the price gap between the ADR (SKHY) and the underlying shares (SKHX) expanded sharply. During this period, HIP-3 builder TradeXYZ 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 the strongest demand lies.
Note: ADR (American Depositary Receipt) is a certificate issued by a U.S. bank representing shares of a foreign company, facilitating U.S. investors to trade in U.S. dollar markets such as NASDAQ in USD. ADR (SKHY) is the ADR code for SK hynix, listed on NASDAQ, where each SKHY represents 1/10 of the underlying shares (SKHX); the underlying shares (SKHX) are the original shares/related products traded locally in South Korea. After listing, due to strong U.S. stock demand, liquidity differences, and inefficient arbitrage, the price gap between SKHY and the underlying shares expanded significantly.
1. SK Hynix ADR Premium and Hindered Arbitrage
On July 9, SK Hynix sold 177.9 million American Depositary Receipts (ADRs) at $149 per share, raising $26.5 billion. This is the largest ADR issuance by a foreign company in history, surpassing Alibaba's record of $21.8 billion in 2014. The order book was oversubscribed more than 7 times, and the NASDAQ opening price on July 10 was $170.
Subsequently, the price gap between the ADR (SKHY) and the original shares (SKHX) expanded sharply. The premium timeline is as follows:
- July 13: The ADR premium, which was about 3% relative to the issuance price, expanded to 25.6%, while the original shares plummeted 15.4%. The KOSPI index also fell more than 8% during the session, triggering a circuit breaker, but the ADR fell only 9.3%.
- July 14: The ADR surged 27%, closing at $193.92, and the premium relative to the original shares skyrocketed to 51%.
- July 15: The ADR, which had surged the previous day, fell 9%, closing at $176.46, while the original shares rebounded 8.8%. The ADR premium relative to the original shares narrowed from 51% to 30.7%.
The cause of the premium is the closure of the arbitrage channel. In an efficient market, institutions would buy the cheaper original shares, convert them into ADRs, and then sell the ADRs to increase supply and eliminate the spread.
However, this channel is not yet open. This ADR was not created by depositing existing shares, but by issuing 17.79 million new shares to the depository bank (Citibank), with these original shares planned for additional listing on the Korea Exchange on July 29. The Korea Securities Depository stated that applications for mutual conversion between original shares and ADRs would only be possible after this date.
Furthermore, the issued ADRs account for less than 3% of SK Hynix's total shares. U.S. institutional demand encountered supply that could not expand, thus widening the spread.
2. HIP-3 Funding Rates Reveal the Current Stage of Stock Perpetual Futures
During the same period, HIP-3 builder TradeXYZ on Hyperliquid launched perpetual futures markets for both sides. SKHX, tracking the original shares, has been running for some time, while SKHY, tracking the ADR, went live as a pre-IPO contract the day before listing and switched to a standard contract when NASDAQ trading began.
As the gap between the original shares and the ADR widened, the funding rates of the two markets diverged in opposite directions. On the 13th, while the original shares plummeted, the SKHX funding rate jumped to +0.10% per hour, while SKHY dropped to -0.065%.
A positive funding rate means longs pay shorts, while a negative rate is the opposite. This indicates that longs rushed to the original shares side simultaneously, while shorts rushed to the ADR side. This combination points to a single position—a trade betting on the narrowing of the premium executed on Hyperliquid.
This event validates several hypotheses about stock perpetual futures through a single case. It directly demonstrates what stock perpetual futures actually provide, what the current market lacks, what their relationship is with the underlying markets, and which markets give them the strongest demand:
- Expressiveness bypassing spot market friction: Betting on the narrowing of the premium requires buying original shares and shorting ADRs. In the spot market, this requires KRW funds, foreign investor accounts, settlement infrastructure, and ADR borrowing conditions. In perpetual futures, it can be achieved simply by using USDC as collateral and trading two contracts on a single platform.
- Lack of tools to separate funding rates: The current bilateral betting position structure is not ideal. Even if the premium persists, funding rates accumulate hourly, leading to collateral shrinkage. In spot arbitrage, once original shares are converted to ADRs, the spread can be immediately locked in as realized profit, but perpetual futures lack this forced convergence mechanism. SKHX converges to the original share index, SKHY converges to the ADR index, and neither can narrow the gap between the two indices. Perpetual futures reflect the spread of the underlying market but do not solve it. Even if the direction is correct, convergence too late will allow accumulated holding costs to erode returns. Ultimately, it is a structure that carries both the view that "the premium will narrow" and holding costs.
- Need for a separate market to trade the funding rate itself to separate the two. For example, Pendle's Boros tokenizes funding rates into YU (Yield Unit), splitting them into fixed and floating parts. Positions paying funding rates, like SKHX longs, can buy YU receiving floating funding rates on Boros to offset costs. This achieves a hedge converting variable costs into fixed costs. The cost itself does not disappear, but future expenditures can be locked in at entry, thereby enabling position size management. However, markets currently supported by Boros are limited to mainstream assets like BTC and ETH, and HIP-3 stock perpetual futures are not yet included. Therefore, trading this spread currently means bearing the volatility of funding costs.
- Function of perpetual futures as a leading indicator: TradeXYZ's SKHY pre-IPO market pointed to $164 three hours before NASDAQ opening, $169.80 one hour before, and $169.92 one minute before, while the actual opening price was $170. The SKHX market also trades during nights and weekends when KRX is closed, and Korean traders use its price as a leading indicator for the next day's opening. Perpetual futures are no longer limited to the derivative role of tracking underlying assets, but generate prices first during periods when the original market is closed.
- Market value inversely proportional to underlying asset accessibility: These are two futures contracts tied to the same company, but SKHY's funding rate remained basically around zero except during periods like the sharp spread expansion on the 13th. The reason is that physical ADRs exist on NASDAQ, and U.S. options were also listed from the 14th, allowing arbitrageurs to collect the basis. However, SKHX has no hedging tools, and the funding rate becomes the only mechanism to clear the market, so it became the single largest contract, accounting for 33% of HIP-3's total trading volume and 50% of stock perpetual futures trading volume. Listing perpetual futures for liquid U.S. large-cap stocks is equivalent to rebuilding something that already exists. The more access is hindered, the higher the value of the perpetual futures contract.
The node worth watching in the future is July 29. When the original shares are additionally listed on the Korea Exchange and applications for mutual conversion between original shares and ADRs open, the hindered arbitrage channel will partially open.
However, even if the channel opens, asymmetry remains. There is no limit to redeeming ADRs for original shares, but converting original shares to ADRs can only be done within the issuance cap, and compressing the premium requires the latter.
For this reason, it remains uncertain whether the premium will narrow sharply, but even so, Hyperliquid remains the only place where this spread can be traded.
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