Original author: Eren, Four Pillars

Original compilation: AididiaoJP, Foresight News

After the ADR was listed on Nasdaq, the price gap between the ADR (SKHY) and the underlying shares (SKHX) sharply widened. During this period, Hyperliquid's HIP-3 builder TradeXYZ opened perpetual futures markets for both. The funding rates in these two markets clearly demonstrate what the stock perpetual futures actually provide, what the market lacks, how they interact with the underlying spot market, and where the strongest demand is attracted.

Note: ADR (American Depositary Receipt) is a certificate issued by a U.S. bank representing shares of foreign companies, facilitating trade in U.S. dollar on U.S. stock markets like Nasdaq. ADR (SKHY) is the ADR code for SK hynix, listed on Nasdaq, with each SKHY representing 1/10 of a share of underlying shares (SKHX); the underlying shares (SKHX) are the original shares/traded products in South Korea. After its listing, due to strong demand in U.S. stocks, liquidity differences, and arbitrage difficulties, the price gap between SKHY and the underlying shares widened significantly.

1. SK Hynix ADR Premium and Arbitrage Obstacles

On July 9, SK Hynix sold 177.9 million American Depositary Receipts (ADR) at a price of $149 each, raising $26.5 billion. This is the largest ADR issuance by a foreign company in history, surpassing Alibaba's $21.8 billion record in 2014. The subscription book was oversubscribed by more than 7 times, with the Nasdaq opening price on July 10 at $170.

Subsequently, the price gap between the ADR (SKHY) and the original shares (SKHX) sharply widened. The premium timeline is as follows:

• July 13: The ADR premium, which was about 3% relative to the issue price, expanded to 25.6%, while the original shares plummeted by 15.4%. The KOSPI index also fell by more than 8% during the day, triggering a trading halt, but the ADR only decreased by 9.3%.
• July 14: The ADR surged by 27%, closing at $193.92, with the premium compared to the original shares skyrocketing to 51%.
• July 15: The ADR, which had surged the previous day, fell by 9% to close at $176.46, while the original shares rebounded by 8.8%. The premium of the ADR compared to the original shares narrowed from 51% to 30.7%.

The reason for the premium is the closure of the arbitrage channel. In an efficient market, institutions would buy the cheaper original shares, convert them to ADRs, and then sell the ADRs to increase supply and eliminate the price difference.

However, this channel is currently not open. The ADR was not created by depositing existing shares but rather by issuing 17.79 million new shares to the depository bank (Citibank), with these original shares scheduled for additional listing on the Korean Exchange on July 29. The Korean Securities Depository stated that applications for mutual conversion between the original shares and the ADR would only be feasible after that date.

In addition, the issued ADRs account for less than 3% of SK Hynix's total shares. The demand from U.S. institutions faced an inelastic supply, leading to an expanded price difference.

2. HIP-3 Funding Rates Reveal Current Stage of Stock Perpetual Futures

During the same period, TradeXYZ opened perpetual futures markets for both sides on Hyperliquid. The market tracking the original shares, SKHX, has been running for some time, while the market tracking the ADR, SKHY, was launched as a pre-IPO contract the day before listing and transitioned to a standard contract when Nasdaq trading began.

As the gap between the original shares and ADR widened, the funding rates in the two markets exhibited diverging trends. On the 13th, while the original shares plummeted, the SKHX funding rate surged to +0.10% per hour, while SKHY dropped to -0.065%.

A positive funding rate means that longs pay shorts, whereas a negative rate is the opposite. This indicates that longs are flooding into the side of the original shares while shorts are flooding into the ADR side. This combination points towards a single position—executing a trade on Hyperliquid betting on the narrowing of the premium.

This event validated several hypotheses regarding stock perpetual futures through a single case. It directly showcases what stock perpetual futures actually provide, what the current market lacks, the relationship with the underlying market, and which markets provide them with the strongest demand:

• Ability to circumvent friction in the spot market: Betting on a narrowing premium requires buying original shares and shorting ADRs. In the spot market, this requires conditions such as Korean Won funding, foreign investor accounts, settlement infrastructure, and ADR lending. In perpetual futures, it can be achieved by using USDC as collateral and trading two contracts on a single platform.
• Absence of a separated funding rate instrument: The current bilateral betting position structure is not ideal. Even if the premium persists, funding rates accumulate hourly, leading to a shrinkage of collateral. In spot arbitrage, once original shares are converted to ADRs, the price difference can be immediately locked in as realized profits, but perpetual futures do not have this enforced convergence mechanism. SKHX converges to the original share index, while SKHY converges to the ADR index, and both cannot reduce the gap between the two indices. Perpetual futures reflect the price gap in the underlying market but do not resolve it. Even with the correct direction, late convergence can erode returns through accumulated holding costs. Ultimately, it is a structure that carries both the view that "the premium will narrow" and holding costs simultaneously.
• Need for separate market trading of funding rates themselves to segregate the two. For example, Pendle's Boros tokenizes funding rates into YUs (Yield Units), dividing them into fixed and floating parts. Positions like SKHX longs that pay funding rates can buy YU on Boros to receive floating funding rates, offsetting costs. This achieves a hedge that converts variable costs into fixed costs. While the costs themselves do not disappear, future expenditures can be locked in at entry, allowing for position size management. However, currently, Boros only supports markets for mainstream assets like BTC and ETH, and HIP-3 stock perpetual futures are not yet included. Thus, trading this price difference currently means bearing the volatility of funding costs.
• Function of perpetual futures as leading indicators: TradeXYZ's SKHY pre-IPO market pointed to $164 three hours before the 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 overnight and on weekends while the KRX is closed, with Korean traders using its prices as leading indicators for the next day's opening. Perpetual futures are no longer limited to tracking the derivative role of the underlying asset but have begun to generate prices during times when the primary market is closed.
• Market value inversely proportional to accessibility of the underlying asset: This binds two futures contracts to the same company, yet the funding rate of SKHY has remained close to zero outside periods where the price gap soared on the 13th. The reason is that there are physical ADRs on Nasdaq and U.S. options have been listed since the 14th, allowing arbitrageurs to collect basis. In contrast, there are no hedging tools for SKHX, making the funding rate the only mechanism for market clearing, thereby making it the single largest contract, accounting for 33% of total HIP-3 trading volume and 50% of stock perpetual futures trading volume. Listing perpetual futures for highly liquid U.S. large-cap stocks is akin to building again on what already exists. The more obstructed the access, the higher the value of the perpetual futures contract.

Future points of interest include July 29. When original shares are additionally listed on the Korean Exchange and applications for mutual conversion between original shares and ADRs are opened, the blocked arbitrage channel will be partially opened.

However, even if the channel is opened, asymmetry still exists. There are no restrictions on redeeming ADRs for original shares, but the conversion of original shares to ADRs can only occur within the issuance limit, and compressing the premium requires the latter.

Therefore, whether the premium will sharply narrow remains uncertain, but even so, Hyperliquid remains the only place to trade this price difference.

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