Investment Insights

Jeff Benjamin

Lights! Camera! Futures trading!

Cantor Fitzgerald takes a second crack at launching a movie exchange

By Jeff Benjamin

Mar 8, 2009 @ 12:01 am (Updated 5:19 pm) EST

Bizarre as it might initially sound, it is possible that the timing is right for a futures exchange to trade contracts based on movie ticket sales.

The plan — initially spawned more than seven years ago by Cantor Fitzgerald LP of New York — is to launch a platform to trade futures contracts pegged to box office receipts.

The Commodity Futures Trading Commission has until May 27 to rule on the Cantor Movie Exchange. If approved, the exchange will be a real-dollar version of the Hollywood Stock Exchange in Century City, Calif., which Cantor purchased in early 2001.

The company announced the original effort to secure regulatory approval for the idea Sept. 4, 2001, but shelved it after the Sept. 11 terrorist attacks killed 638 Cantor Fitzgerald employees who were working in the World Trade Center in New York.

The effort was reborn in late 2007 when Richard Jaycobs, the new-project leader, was assigned the task of getting the exchange up and running.

The basic idea involves trading contracts based on estimated total box office sales for the first four weeks after a movie's debut.

Each contract will trade at one one-millionth of the total ticket sales estimate.

For example, a contract predicting that a movie will gross $100 million would trade for $100.

If the movie grosses more than $100 million, the contract value increases proportionately. It declines if the movie doesn't reach the $100 million total after four weeks.

According to Mr. Jaycobs, there are about 300 movies made every year, and he expects initially to offer futures contracts on between 50 and 100 of the most popular ones.

For most movies, the trading will begin six months prior to the scheduled release date and run through the fourth week after the release.

The value of the futures contracts will be based on projections of a movie's success leading up to its debut date.

An example of how early forecasts can create an investment opportunity is the 2008 release of the "Batman" sequel "The Dark Night."

Before the debut, the movie was expected to gross about $150 million, but total sales after four weeks hit $350 million.

Although the exchange is still technically a work in progress, Mr. Jaycobs is already thinking about the next level, beyond movies and entertainment to futures trading on everything from the weather to real estate markets.

"The ultimate build-out will depend on ideas and on what would trade," he said.

There is a precedent for these kinds of open-interest platforms in which the number of contracts can be larger and not directly connected to the underlying market.

During the presidential campaign, for example, the University of Iowa in Iowa City ran a futures exchange to predict the outcome of the election.

This particular exchange, which operates on a CFTC research and educational exemption, was established in 1988 and remains the only predictive market operated inside the United States that trades real money.

TRADING ANYTHING

The Cantor Fitzgerald project essentially is betting that there is more than a little truth behind the adage that commodities traders will trade anything.

Of course, the exchange might also get a boost from the sour state of the financial markets.

"Technically, you can trade anything, because wherever there is a financial interest, there can be a market," said Andre Julian, chief financial officer of Option Investments Inc., an Irvine, Calif.-based independent broker for futures and options traders.

"People love stats, and movies are something people understand, which is why it could bring some regular people into the futures markets for the first time," he said. "Of course, it might be more difficult if it was launched in the middle of a bull market, when there would be no reason to look beyond stocks."

With a $50 trading minimum, the movie futures exchange clearly is hoping to attract a segment of retail-class investors and movie junkies, but once developed, the exchange could also become a vehicle to allow movie moguls to hedge their investments.

"If it costs a studio $200 million to make a movie, that studio could use this exchange to protect its investment by going short the same amount, and then if they're losing money on the open market, they could make it back on the short side," Mr. Julian said. "It all comes down to money, and there's always somebody on the opposite side willing to make a trade."

Questions? Observations? Stock tips? E-mail Jeff Benjamin at jbenjamin@investmentnews.com.