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Thursday, March 11, 2010

From Hog to Film Futures, Coming Soon to a Market Near You

Movie Earlier this week, there was a story on NPR's Marketplace about commodity futures trading, and the transition of most of the trading from the floor to computer screens. The story noted one holdout, however: livestock futures.  Floor trader James "Bugsy" Brooks explained why the livestock markets, cattle and hogs, have been slower to go electronic:

The cash livestock trade has always been a verbal, handshake, word-of-mouth agreement. And so they were very comfortable still having that personal relationship.

Nevertheless, the story noted that even livestock futures trading has largely transitioned to computer -- with more than 50% of cattle futures traded electronically, and around 70% of hog futures following suit.

Hogs for sale Before you get nostalgic for the old days of traders in coats, shouting and waving around their arms on a trading floor, realize that this same technology has paved the way a new type of futures trading: movie futures.  The New York Times DealBook reports today:

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.

Whether its movie or hog futures, it is a gamble.  Iowan hog farmer Todd Wiley never knows if he will make enough money selling his hogs to cover the cost of their feed, so he hedges by selling futures contracts on the Chicago Mercantile Exchange.  The contracts guarantee a price for his hogs, and Wiley told Marketplace:

I'm not a big gambler.  I mean, we drive by casinos and my buddies say you want to stop and play a little bit, and I say "I play every day." Everything's a gamble, and you manage your risk to the best that you can. 

It does bring that Oscars pool to a whole new level.

[Meredith R. Miller]

http://lawprofessors.typepad.com/contractsprof_blog/2010/03/from-hog-to-film-futures-coming-soon-to-a-market-near-you.html

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