March 11th, 2010 - Open Knowledge — LiveJournal
Mar. 11th, 2010
Cantor Futures Exchange, a subsidiary of Cantor Fitzgerald, expects to open an online futures market next month that will allow studios, institutions and moviegoers to place bets on the box-office revenue of Hollywood’s biggest releases. Last week, the company learned from regulators that customers could start putting money into their accounts on March 15.
“I’ve worked in the futures industry for a long time,” said Richard Jaycobs, the president of Cantor Exchange, who has worked with derivative markets and the cotton exchange. “And none of the products has the overall appeal that this does. This just has a tremendous potential audience.”
Betting on the success of Hollywood releases has long been a parlor game for moviegoers. In 2001, Cantor Fitzgerald bought the Web site HSX.com (for “Hollywood Stock Exchange”), where users can place bets with play money on a film’s box-office success; smart traders win little more than satisfaction. Mr. Jaycobs said that he hoped to lure a sizable portion of that site’s 200,000 active users to the real futures exchange.
But buyers beware: if “Avatar” is any indication, the public isn’t always so wise about Hollywood fortunes. Most users of HSX.com predicted a flop, and if those users had placed real money on the Cantor exchange, they would have taken a serious hit.
In the real market, contracts on the Cantor exchange will trade at $1 for every $1 million a movie is expected to bring in — a figure determined by traders — at the domestic box office during its first few weeks in theaters. So if “Robin Hood” is expected to bring in $100 million in its opening weeks, a single contract could be bought for $100 by a trader who thinks Russell Crowe’s role in the movie will drive sales far above expectations. If that trader guesses right, and the movie sells $150 million in tickets, the trader makes $50.
Mr. Jaycobs said the metric used — domestic box-office receipts — “is as simple as it can possibly be.” He hopes the business will also attract professional and institutional investors. If a movie distributor, for example, screens a movie it has backed and thinks sales will beat expectations, the company can take an even bigger financial stake in the movie by buying contracts for it. The possible mix of investors — Hollywood insiders and moviegoers at large — creates an interesting laboratory, said P. Clark Hallren, a managing partner at Clear Scope Partners, a financial adviser to entertainment businesses who advises Veriana Networks, a company that is planning its own futures trading operation.
“Who knows more about the movie, the studio who made the movie or the public, who says ‘I’m going to go see it or not see it?’ ” he said.
Cantor expects to open the exchange shortly after April 20, when it hopes to get final regulatory approval from the Commodity Futures Trading Commission, the government agency that oversees futures markets. The box-office receipts will be based on figures provided by Rentrak, a company that can provide almost real-time sales data.
As in other futures markets, investors will also sell — or “short” — contracts. If a distributor thinks a movie it is backing will struggle at the box office, the company can sell contracts in the futures market. If the distributor shorts a $100 contract and the movie grosses $50 million, the distributor will make $50, thereby limiting the company’s total losses from a film.
Conflict-of-interest issues are handled by limiting the amount a company can hedge through the exchange, so that a distributor could never make more money by betting against a film through futures than by having that film succeed in theaters.
“The nature of the futures business is that many of the traders are in the business they’re investing in,” said R. David Gary, a spokesman for the trading commission. If an investor in agriculture sees that bad weather is going to lower the yield, he said, it is possible to hedge that investment by shorting a crop in the futures market.
Veriana Networks, a privately owned media and technology company, plans to operate a competing trading exchange, called Trend Exchange, in Chicago after receiving regulatory approval, which the company expects later this month. Trend Exchange, however, will work only with professional and institutional investors and will build the market slowly, said Rob Swagger, Veriana’s chief executive, describing his business as the “tortoise” in the race.
Mr. Swagger said that demand and recent developments, including the advent of electronic trading and audited box-office figures, had provided the opportunity to create the new market.
Hollywood investors have long hedged their risks, buying insurance against bad weather during outdoor filming, for example. But reducing the risk of poor box-office results has been much tougher, said Alice P. Neuhauser, an adviser to Veriana who manages entertainment assets for Kushner-Locke, a film and television distributor in Beverly Hills, Calif.
These new markets, she said, present Hollywood investors with “an opportunity to acquire a contract to minimize the downside risk.” Or, she said, “you can double down on an investment that you think is going to do well.”
The new markets also present an opportunity for people and companies to put their money into a movie project that they otherwise had no opportunity to invest in, she said.
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