Online box office futures exchanges readying debuts (NYT, FT, LAT)

By Nancy Tartaglione

Cantor Futures Exchange, a subsidiary of Cantor Fitzgerald, is readying 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. According to The New York Times, the company now expects to go live next month after learning last week that customers could start putting money into their accounts on March 15.

"I've worked in the futures industry for a long time," Richard Jaycobs, the president of Cantor Exchange, told The New York Times. "And none of the products has the overall appeal that this does. This just has a tremendous potential audience."

In 2001, Cantor Fitzgerald bought the Web site HSX.com ("Hollywood Stock Exchange"), where users place bets with play money. Jaycobs hopes to lure a sizable portion of that site's 200,000 active users to the real futures exchange.

Contracts on the Cantor exchange will trade at $1 for every $1 million a movie is expected to bring in at the domestic box office during its first few weeks in release.

Jaycobs said the metric used "is as simple as it can possibly be." He hopes the business will also attract professional and institutional investors. "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.

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, the NYT explains.

Conflict-of-interest issues are handled by limiting the amount a company can hedge through the exchange.

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. It, however, will work only with professional and institutional investors and will build the market slowly.

Veriana, according to The Financial Times, is being advised by "prominent members of the entertainment and financial services industries," as well as experts from the Chicago futures trading community.

The move to launch the exchanges, says the FT, is a sign that some in the film business believe the exchange-traded futures markets might offer a new way to help film producers manage financial risks.

Producer Ralph Winter told the FT: "Being a producer in today's marketplace, requires attracting production capital much like the farmers and ranchers did in the last century."

Speaking to The Los Angeles Times, the aptly-named finance professor Don Chance said, "There is a tremendous amount of risk in every movie and a need to manage that risk...I would think a futures market would have great potential to do that."

Reducing the financial risk of filmmaking through futures contracts could bring more investment to Hollywood, notes the LAT. The surge of private equity money into the movie business has dried up because returns were uneven and often lower than promised.

"This product could help to even out the volatility of the movie business," Clark Hallren, a former JPMorgan Chase & Co. entertainment banker who is consulting for Veriana, told the LAT.