A Derivatives Market for Hollywood Films?

As Mother Jones reports... Wall Street has finally identified a way for itself to hedge it's bets on Hollywood films...

If this gets authorized by the Commidity Futures Trading Commission (CFTC), it will make for an interesting panel event to say the least. :)

If you thought the mortgage-backed securities and other complex financial instruments that crashed the economy were risky, you’ll love Wall Street’s latest brainwave: a new financial market in which players can gamble on whether upcoming Hollywood movies will be blockbusters or bombs.

For years, Cantor Fitzgerald, a Wall Street investment firm, has been operating the "Hollywood Stock Exchange," a fake-money game in which players trade "stocks" to bet on how films will do at the box office. Now Cantor could soon get government permission to make a real-money version of the game—a market in which players can gamble on the success or failure of, say, Pirates of the Caribbean 4. Critics are worried that this new market could be vulnerable to insider trading and create bizarre incentives for moviemakers—and that it will also enlarge the risky family of financial products that helped trigger the economic crisis.

Here's how it would work. Hollywood studios, actors, directors, investment banks, hedge funds, and anyone else would be able to buy and sell contracts based on the value of all ticket sales in the first four weeks of a movie's release. According to Cantor Fitzgerald's plans, the contracts would each be worth one-millionth of a given movie's gross sales during that four-week period. Let’s say that you thought Avatar would pull in $500 million during its first four weeks. So, you buy 100 futures contracts at $490, figuring that when Avatar made $500 million you’d be up $1,000. Unfortunately, as it turned out, Avatar "only" made some $430 million domestically in the first month after its release—meaning that you’d lose a cool six grand.

One problem, skeptics say, is that Hollywood insiders could have a huge advantage in such a market. People in the movie business often have far greater access to crucial information about a film’s box office prospects than ordinary investors do—such as how big the marketing budget will be or how bad the performances are. "If the industry is selling, odds are that it is a bad idea to buy," says Dean Baker, the codirector of the Center for Economic and Policy Research.

Another problem, says Stout, the law professor, is that such a market creates "all sorts of perverse incentives to manipulate the success of movies." Let’s say you were responsible for Gigli, and you realized during filming that it was shaping up to be one of the worst movies ever made. Instead of writing off the $54 million you’d shelled out to make the film, you could simply buy up a stack of futures contracts priced on the assumption that the movie would tank. Then, to nudge that failure along, you could slash the marketing budget, or decide to add 30 more dreadful minutes to the final cut. Played correctly, a studio could inflict a movie like Gigli on the world and still turn a profit. If box office futures trading happens, being a Hollywood insider would take on a whole new meaning.

Proponents of the concept argue that the plan would simply allow moviemakers to offset their risks. Media Derivatives, Inc., another company that has applied for government approval for a box office futures market, said in a submission to regulators that it wants to enable "risk transfer…from the producers, studios, theaters, and financiers/film funds to a community of speculators willing to assume these risks in return for being paid risk premiums."

Stout says there could be a legitimate case for a futures market limited to players with an economic stake in a movie's success. But Cantor has no plans to restrict trading to those with skin in the game. If it gets the green light from the government, the firm plans to hold "boot camps" across the country to familiarize people with box office futures trading. And it's already recruiting players of its Hollywood Stock Exchange game to set up accounts to "practice" for the rollout of the real market. One New York investment firm, SAGA Capital, has said it will launch a hedge fund focusing on box office futures if Cantor’s plan gets the go-ahead.