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UPDATES WORST IDEA EVER? Wall Street Plans Futures Exchange Tied To Box Office
Back in December 2008, Nikki reported that a leading Wall Street brokerage house, Cantor Fitzgerald, was seeking permission from U.S. regulators to set up a futures exchange to trade contracts on the expected weekend box office of major motion pictures. Now the Cantor Futures Exchange is about to launch and and begin taking these bets in what she called it the “Worst Idea Ever” since studios can make bets on their own movies to increase total revenue or hedge losses. Now I can tell you that, in a system that could have come right from Las Vegas, contracts will trade at $1 for each $1 million of box office business, for making over and under bets on gross estimates worked out months in advance. I agree with her: I just don’t how turning the film industry into a cousin of sports betting is constructive, but I do see how it could lead to bad things in a business already fraught with conflict of interest issues.
The plan has been in the works for almost five years, I’m told. That predates the near collapse of the financial system, some of which was blamed on short-selling and the preoccupation with creating wealth while not actually building anything. How is this different? The notion that film financiers, even studios, can hedge their investments by betting against estimated box office gross is a little chilling. Baseball’s hit king Pete Rose was thrown out of the sport and denied entry into the Hall of Fame for betting on his team. What is a star or director going to think if he discovers his film financier or studio bet against the film they worked so hard to make?
Will there be temptation by a hedge fund that backed a slate of movies to find out about test screening results to inform wagers? Filmmakers have trouble enough keeping their test screenings off the internet. In the new betting system, whispers about early reaction to a film becomes valuable currency, the way that early injury reports are to sports bettors.
So how is this good for moviemaking?
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Seems ridiculous that CF believes studios would be trading on this market. They’d need to take a position on one side of hundreds of thousands of contracts just to construct an adequate hedge. Nevermind the large trader restrictions in the bindustry, or the fees that would be associated with trading hundreds of thousands of contracts on a single movie.
This HSX exchange, whether for play money or for real money, is just for average joes that want to bet on a movie. Any other suggestion is disingenuous at best.
I wonder if they’ll be offering credit default swaps. Maybe they can take down a few more banks.
Although it is not a film, they should put Deadline Hollywood in the mix.
What do you think, Nikki? Would you make insider bets on Deadline Hollywood revenue if you had the opportunity?
And if so, would you… like other insiders… have an edge?
Yo Abe, are you working for Cantor? Whats your stake in this. You sound like a complete con. You sound like Alan Greenspan the moron who sold people on perpetual deregulation. Why don’t you crawl back under your rock and go back to rolling little old ladies or theiving off pension funds. You people are all the same aren’t you? Whenever you see a feverish opportunity to steal from unsuspecting sheeple you pull your 3 card Monty routines, the same thing Goldman and Bernanke and the other shyters who shuffle money around all day, hide debt, disguise fraudulent trades,cheat and lie do. Be careful. Soon enough entire populations will turn on scum like you and come for you with pitchforks and nooses.
What an asinine litter of scamsters and shylocks.
Why doesn’t anybody want to put money into making good movies & TV shows? Is it all scams & schemes with people now?
Wouldn’t it be great if an indie film could be invested in by individual donations, similar to a political campaign? I’m not sure if a market like this would be able to do that, but it certainly makes one consider the idea. Why hasn’t this been tried yet? Why can’t an indie producer create a web site and solicit investments in their film? If for some reason the film never earns enough to start production, they can send the money back. I know there may be a downside to making the script publically available, but on the other hand some of these films might be based on pre-existing books or other works anyway. And maybe some could have a commitment of a director, writer, actor, etc. in lieu of publishing the script. Or long excerpts or summaries of the script could be published, without giving away all the story details.
Serious question: can someone explain the mechanics of this, as compared to other markets? For example, if a producer needs his film to make $5M to cover expenses and make a modest profit, but is worried it’ll only make $4M…and say Cantor is trading at $5M…how many shares of this does he actually have to short – a million of ‘em at $1 each? And who the heck is taking the other side of that?
And on HSX, does somebody really take the other side of any position you take, or is it fake ‘house’ money taking that position?
I’d like to understand this better.
you can hold up to 100 positions either long or short. one position is worth whatever the price is for that title. (one position for toy story 3 held long or short is $331) C/F will make its money by fees and dues. For taking the other side i don’t know. As for hsx its all fake and its played as a stock market unlike C/F futures trading which has different rules and regs.
The purported rationale for the exchanges is so movie producers can hedge their risk, but that doesn’t make much sense. It’s not like Southwest Airlines using futures to lock in the price of a commodity like fuel, it’s more like them betting on their planes crashing. It’s not hedging as in selling the foreign rights, it’s insider trading. If I’m an executive at Ford, for example, and I know one of our new models will not sell well, I can’t just go out and short the company’s stock. Unless I had insider knowledge I wouldn’t be investing in these exchanges, and if I did I would be breaking the law.
This is great for the movie industry. Sports gambling has made sports insanely popular in this country and this could give the movie industry a boost if casual moviegoers become more interested in the business. The weekend top 10 is already in every newspaper on Monday morning for people to read like box scores from sports games.
Interesting theory, but seems like a pipe dream. Sports seem to work as a common interest for the type of people who are also interested in gambling (aggressive, testosterone, risk-takers, good with numbers, etc.). There are probably not as many of those people interested in discussing over the water cooler on Monday morning how well Valentine’s Day, The Princess and the Frog or Sandra Bullock’s latest romantic comedy grossed over the weekend. And for every Die Hard there are 5 movies geared to young kids or women. Kids don’t have money and women do not typically fit the profile of people interested in heavily speculative gambling/investing. Whatever this amounts to, it’s going to be served up for a narrow niche group of participants.
There will be no liquidity in these options, as very few people will actually trade them, which will doom this experiment.
When I read about this type of “gambling” on film’s releases, it reminds me of when the insurance companies came in “guaranteeing” the recoup for investors. Eventually there will be a rash of duds, resulting in losses and lawsuits. It always looks good on paper. The studios continue to practice the cross-collateralization( where the winners pay for the losers) but they don’t want to be the ones holding the bag. This is the type of creative accounting and off-sheet financing that the industry is famous for. Unfortunately the ups and downs of the studio business has always been a tough nut for investors who expect a steady balance sheet. Film production remains the land of the free and the home of the brave.
While this financial product might seem like a dream come true for the Max Bialystocks of the world, apparently there are some trading rules to prevcent conflicts of interest…
According to a Wednesday New York Times article from , “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.”
I personally downloaded the contract rules from the Cantor Exchange site and found this entry:
II-4. Position Limits in DBOR Contracts
(a) Subject to any available hedge exemptions (discussed in Rule II-3(b)), a
Participant will not be permitted to hold a net long or net short position in any DBOR Contract
that exceeds 10,000 DBOR Contracts.
(b) Entities that are engaged in hedging activities through the use of short
positions in DBOR Contracts, and Market Makers, may be granted hedge exemptions that
exceed the short side speculative position limits by application to the Exchange; provided,
however, that no short side hedge exemptions will be granted that would permit sale of more
than 30% of the underlying position on which such hedge exemption is based and provided
further that under no circumstances shall any hedge exemption be granted that would permit a
Participant to hold a position exceeding 300,000 DBOR Contracts. Commercial entities eligible
for short side hedge exemptions include (but are not necessarily limited to) film studios, film
funds or other investors in films. Participants that are engaged in hedging activities through the
use of long positions in DBOR Contracts, and Market Makers, may be granted hedge exemptions
that exceed the long side speculative position limits by application to the Exchange. Any
application for hedge exemptions made under this Rule shall include by any information or
supporting material prescribed or reasonably requested by the Exchange, and shall include such
facts as may be necessary to demonstrate the applicant’s need to use DBOR Contracts for
hedging purposes.
Frankly, I don’t see how a 10,000 contract short position can evenly remotely provide an effective hedge for a film concern with tens of millions of dollars on the line when you cosider that a $1,000,000 change in revenues causes a $1.00 change in the value of a contract. So, say a film comes up $30 million short of expectations and XYZ movie studio took out a maximum 10,000 contract short. That equates to a $300,000 profit on the short posiiton. Essentially meaningless for a studio or producing concern. However, it presents a fun opportunity for passive speculators to put there money where their mouths are. If you’ve got the stomach for it. On the other hand, the rules do state that “hedge exemptions” can be granted. So who knows how much a producing concern can ultimately bet against a production. There could be some 21st century Max Bialystocks lurking out there which can dupe passive specualtors who believe in a movie’s prospects. Caveat Emptor, in spades.
This is so pointless.
“So, say a film comes up $30 million short of expectations and XYZ movie studio took out a maximum 10,000 contract short. That equates to a $300,000 profit on the short position.”
That would be true if the movie’s stock is only $1/share. Most movies on CX trade between $30 and $300/share, however. Depending on the share price, a 10,000 share position could be a sizeable and effective hedge.
Nope, you’re a little confused. Here’s how it works…
The price of a contract will be one-millionth the anticipated 3-week domestic box office and each one-million-dollar change in actual domestic box office receipts above or below that anticipated figure equals to a one-dollar change in the value of the contract. Period.
So, for example, if the anticipated 3-week DBOR is $120 million, that means one contract will cost $120. And if the actual 3-week DBOR is a miserable failure at $50 million, then shorting a contract will yield a $70 profit per contract. That’s an extreme case, and even at that level of disappointment, shorting a maxmimum 10,000 contracts will only yield $700,000 in profits. Again, virtually meaningless for a production that costs tens of millions. Even for a small production, the proportions remain the same. If a 3-week anticipated DBOR is only anticipated at $5 million, then a contract will cost $5, and if it only brings in $1 million, then a 10,000 contract short will only bring in $40,000 … not much of a hedge even for a small production.
The net take-away is that this will primarily be a passive speculating tool. Will industry insiders have an advantage based on things they know about a production? Maybe, maybe not. There are so many industry boards tracking movie productions that it would be hard to possess exclusive knowledge.
See below, extracted from their contract rules.
The unit size of each DBOR Contract will be the aggregate DBOR during the DBOR Determination Period for the relevant underlying film title, divided by the contract divisor of 1,000,000. Therefore, each DBOR Contract will represent 1/1,000,000th of the aggregate DBOR during the DBOR Determination Period; a $1,000,000 change in revenues will cause a $1.00 change in the value of a Contract. The method of determining the Final Settlement Price is further described in Rule II-13(a).
Filmmakers — welcome to the world in which distributors create a financial model based off of this system.
You’ll get to watch as your distributor bets against their own film on this exchange, then tanks the P&A, thereby absolutely ensuring the film won’t perform. So they save themselves the P&A that would have otherwise gone out the door, and made some modicum of cash out of the deal anyway.
Fun times ahead!
Abe, that was a fantastic post! Thanks so much for offering your analysis. I came in here undecided on the merits of this but you easily presented the most well-written, well-informed, detailed, educated, carefully thought out argument for either side. I’m not convinced by any of these doomsday scenarios people have been suggesting. I’d like to hear more discussion of the upside, aside from some speculators making money and the “hedging” on potentially risky films. I wonder if exhibitors can get a benefit out of it by adjusting how many screens they’re assigning to a film in advance based on the expected gross. And maybe studios can have time to rearrange their schedule if they see a competitor’s movie expected to perform worse or better than they originally thought. This in turn could benefit consumers by making sure popular movies are on enough screens to prevent being sold out and by having release dates rearranged so there isn’t a dreaded “dead” weekend when nothing consumers are interested in is playing.
I think people are missing the real point behind this scam. Wall Street is seeking new markets to create new bubbles and this is it. This combines America’s obsession with Hollywood with its obsession with gambling. It will be brokered off of sites like Yahoo and Facebook with gambling movie clubs springing up all over the place. It will be insider traded like mad creating incredible spread opportunities and windfalls for criminal syndicates like Goldman Sachs. America produces very little of concrete value in the manufacturing sector any longer and most decent jobs have been shipped overseas in a labor arbitrage by CEOs looking for slave labor. America is literally now decending into a feudal-gulag-casino where people will be buying lottery tickets desperately in a vain attempt to climb out of massive debt levels. This new scam is the perfect emotional and finanicial predator designed to suck the last remaining coin from the pockets of the middle and lower classes. Watch.
The basic drive of Wall Street is to feverishly look for or design out of thin air new bubble markets. It has been this on steroids since Alan Greenspan created the concept of interest free money for Banks during his reign of absolute terror and corruption and massive income redistribution upwards. this is simply another scheme to trick the unsuspecting and redistribute further wealth upwards in the great feudal society formerly known as the United States.
Take the following with a big fat pinch of salt, but according to the rumour-mill CantorFitzgerald has not yet paid HSX Holdings Inc. shareholders anything for the “deal” that 2001 deal.
The “transaction” occurring in 2001 – you know, the one that transferred HSX Holdings Inc. voting rights to CF – gave the hundreds HSX investors (who invested around $40M) – nothing at all. Sucks to be them, huh?
Allegedly, a board member of HSX – Woody Knight of SBS (Scandinavian Broadcasting Service) – engaged in a pre-arranged, third party transaction that passed voting control to Howard Lutnick at Cantor – in exchange for $2 million in eSpeed stock (Cantor’s publicly listed entity at the time) – seems like an elaborate laundry operation to me… like I said rumours.