HIP-3 Perpetual Futures Arbitrage in Practice: SK Hynix ADR Premium Trading Opportunity

Original Author: Eren, Four Pillars

Original Translation: AididiaoJP, Foresight News

After the ADR listing on Nasdaq, the price gap between the ADR (SKHY) and the underlying shares (SKHX) widened sharply. During this period, the HIP-3 builder on Hyperliquid, TradeXYZ, opened perpetual futures markets for both. The funding rates of these two markets clearly illustrate what stock perpetual futures actually offer, 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, allowing U.S. investors to trade in U.S. dollars on exchanges like Nasdaq. ADR (SKHY) is the ADR ticker for SK hynix, listed on Nasdaq, with each SKHY representing 1/10 of an underlying share (SKHX). The underlying shares (SKHX) are the original stock/related products traded locally in South Korea. After listing, due to strong U.S. demand, liquidity differences, and inefficient arbitrage, the price gap between SKHY and the underlying shares widened significantly.

1. SK Hynix ADR Premium and Blocked Arbitrage

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

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

• July 13: The ADR premium relative to the issuance price of about 3% expanded to 25.6%, while the underlying shares plummeted 15.4%. The KOSPI index also fell over 8% intraday, triggering a circuit breaker, but the ADR only fell 9.3%.
• July 14: The ADR surged 27%, closing at $193.92, with the premium relative to the underlying shares skyrocketing to 51%.
• July 15: The ADR, which surged the previous day, fell 9% to close at $176.46, while the underlying shares rebounded 8.8%. The ADR premium relative to the underlying 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 underlying 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 depositary bank (Citibank). These underlying shares are scheduled for an additional listing on the Korea Exchange on July 29. The Korea Securities Depository stated that applications for mutual conversion between the underlying shares and ADRs will only be possible after that date.

Furthermore, the issued ADRs represent less than 3% of SK hynix's total shares. U.S. institutional demand encountered a supply that could not be expanded, thus widening the spread.

2. HIP-3 Funding Rates Reveal the Current Stage of Stock Perpetuals

During the same period, the HIP-3 builder on Hyperliquid, TradeXYZ, opened perpetual futures markets for both sides. SKHX, tracking the underlying shares, had been running for a while, while SKHY, tracking the ADR, was listed as a pre-IPO contract the day before the listing and converted to a standard contract when Nasdaq trading began.

As the gap between the underlying shares and the ADR 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, and the SKHY rate dropped to -0.065%.

A positive funding rate means longs pay shorts, and a negative rate means the opposite. This indicates that longs simultaneously flooded into the underlying shares side, while shorts flooded into the ADR side. This combination points to a single position—a trade betting on the narrowing of the premium executed on Hyperliquid.

This event verifies several hypotheses about stock perpetuals through a single case. It directly shows what stock perpetuals actually offer, what the market currently lacks, their relationship with the underlying markets, and which markets give them the strongest demand:

• Expressiveness bypassing spot market friction: Betting on premium narrowing requires buying the underlying shares and shorting the ADR. In spot markets, this requires KRW funding, foreign investor accounts, settlement infrastructure, and ADR borrowing. In perpetuals, 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 position structure is not ideal. Even if the premium persists, funding rates accrue hourly, eroding collateral. In spot arbitrage, once the underlying shares are converted to ADRs, the spread can be locked in as realized profit immediately, but perpetuals lack this forced convergence mechanism. SKHX converges to the underlying share index, and SKHY converges to the ADR index; neither can narrow the gap between the two indices. Perpetuals reflect the spread of the underlying markets but do not resolve it. Even if the direction is correct, late convergence allows accumulated holding costs to erode returns. Ultimately, it's a structure that carries both the view that "the premium will narrow" and the holding cost.
• Need a separate market to trade the funding rate itself to separate the two: For example, Pendle's Boros tokenizes funding rates as YU (Yield Unit), splitting them into fixed and floating parts. A position like the SKHX long paying funding costs can offset expenses by buying YU that receives floating funding rates on Boros. This achieves a hedge converting variable costs into fixed costs. The cost itself does not disappear, but future expenses can be locked in at entry, enabling position size management. However, the markets currently supported by Boros are limited to major assets like BTC and ETH; HIP-3 stock perpetuals are not yet included. Therefore, trading this spread currently means bearing the volatility of funding costs.
• Perpetuals as leading indicators: TradeXYZ's SKHY pre-IPO market pointed to $164 three hours before Nasdaq opened, $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 when the KRX is closed, with Korean traders using its price as a leading indicator for the next day's open. Perpetuals are no longer just derivatives tracking the underlying asset; they generate price discovery first when the primary market is closed.
• Market value inversely proportional to the accessibility of the underlying asset: These are two futures contracts tethered to the same company, but SKHY's funding rate remained mostly near zero outside periods like the sharp spread widening on the 13th. The reason is the existence of physical ADRs on Nasdaq and the availability of U.S. options from the 14th onwards, allowing arbitrageurs to capture the basis. SKHX has no hedging tools, making the funding rate the only mechanism to clear the market, so it becomes the single largest contract, accounting for 33% of all HIP-3 volume and 50% of stock perpetual volume. Listing perpetuals for liquid U.S. large caps is like rebuilding something that already exists. The more obstructed the access, the higher the value of the perpetual futures contract.

A key node to watch is July 29. When the underlying shares are additionally listed on the Korea Exchange and applications for mutual conversion between underlying shares and ADRs open, the blocked arbitrage channel will partially open.

However, even if the channel opens, asymmetry remains. There is no limit on converting ADRs back to underlying shares, but converting underlying shares to ADRs is only possible within the issuance cap, and compressing the premium requires the latter.

For this reason, it remains uncertain whether the premium will sharply narrow, but even so, Hyperliquid remains the only place to trade this spread.