The Movies futures market

Is this a sign movies are moving more toward Big Business and away from Art? The Wall Street Journal reported in today's edition, "The Commodity Futures Trading Commission approved Cantor Fitzgerald's application to create a movie futures exchange, even as a US Senate panel is gearing up on Wednesday to consider a bill that would ban such a business. Movie futures exchanges have been opposed by major Hollywood studios and industry groups, including the Motion Picture Association of America."

This proposal by a limited partnership is the second proposed commodities futures market for movies currently under consideration by the CFTC. I'm surprised the studios and theater owners are opposing it since it would allow them to hedge or lock in future prices in what is essentially a hit or miss industry as much as the farming industry or oil. If studio administrators or the owner of a theater chain is afraid a certain film will bomb, they can hedge their investments and spread the risk through the futures market. By the same token, if they expect a picture to be a blockbuster, they can enhance their payoff through the futures market. Seems to me this would be especially attractive to a studio that has fallen on hard times and maybe doesn't have the big stars and prospective blockbuster projects in the works as some of the other producers. In that case, it can invest through the futures market in the expected successes of its competitors.

If I've read (and understood) this right, then this would be pretty much the end of any and all pretence that Hollywood films are artistic expressions. I wonder what it would do to the Oscars, though. Would they be enhanced, with the films that really are the best being looked upon more favourably (as the financial pay off could've/would've already been taken on the market) or would they be looked upon as just another corporate backslapping awards ceremony, no different from best saleman of the year or something like that? OK, I'm pretty sure I know which way it'd go too.

The Oscars won't change, at all. If you think 2008's financial sector meltdown was bad, this will be much worse if allowed w/o some kind of control. (Go ahead, call me a Marxist!)

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No, I completely agree with you, mark. Let's face it, if people with some idea of what they're doing can **** it up so badly, what chance Hollywood folk?

UPDATE:
Received a news release this a.m. from the general counsel of the US Commodity Futures Trading Commission that said the two proposed movie futures exchanges conform to CFTC's current standards for operation, rules, and oversight. He recommended that both be approved. Basically the trade will center on future box office receipts of specific films.

One exchange is Media Derivatives Inc. (MDEX) formed in 2007 to operate as an electronic futures exchange to trade contracts based on movie box office revenues “and other unspecified entertainment industry contracts.” It is a wholly-owned subsidiary of Veriana Networks, Inc., a privately-held media and technology company. MDEX initially intends to trade opening weekend revenue contracts in the form of binary options and collared futures.

The other is the Cantor Futures Exchange, created “to operate a non-intermediated electronic trading system to likewise trade, among other things, futures contracts on movie box office receipts.” It’s a wholly-owned subsidiary of Cantor Fitzgerald, L.P., a global financial service firm.

The CFTC claims its staff “carefully considered the applicants’ submitted materials, representations made, and demonstrations related to the 8 designation criteria and 18 core principles, and in light of the expected novel products that they intend to list, put special emphasis on those designation criteria and core principles relating to the prevention of market manipulation and fair and equitable trading.”

It added, “More specifically, staff considered whether MDEX and Cantor had the ability generally to detect and prevent market manipulation and trade practice violations, and also considered the extra steps MDEX and Cantor would need to take if they offered futures contracts based on box office revenue, such as the implementation of firewalls within a movie studio.”

MDEX requested approval of its contracts based on the opening weekend revenues for the film Takers. Cantor’s request was based on the opening weekend revenues of The Expendables.

I’m not familiar with either film or its opening revenues.

Futures trade in commodities like oil or gold or oranges is usually at least 1 month ahead. For instance the front-month May contract for crude expired at the close of trading Apr. 20 and June became the new front-day contract when trading resumed Apr. 21. But the contracts go forward about as far as anyone can find a buyer or seller—for instance, you can trade futures contracts based on what you think the price of oil will be in April 2020. Seems to me it would be hard to do the same for opening weekend revenues when you don’t even know what weekend, much less what picture will be opening 10 years from now.

Oil is traded in contracts for 1,000 bbl each. But very little of that oil is ever delivered. The way it works, if the expiration deadline for the contract is approaching and you’re holding a buy contract that would require you to take delivery, you then must find someone who will buy that contract from you—usually a person who is holding a sell contract that he can’t deliver--so that your buy contract and your sell contract cancel each other out. So unless you are prepared to take or make delivery of thousands of barrel of crude, you've got to hold a sells contract for every buy contract in your possession on the day the contract expires and all deals are required to be settled. The trick, of course, is to buy low and sell high. Every contract sold in the futures market requires a buyer and a seller and in every deal one makes money and the other losses money (although occasionally someone will just break even)—and both of them pay a fee to the exchange.

I’m still not sure how opening weekend revenues for films would fit into that process, but apparently both exchanges have adapted operations to make it work. Like I said, it would be an excellent opportunity for studios to hedge their risks in case a supposed hit flops instead or increase the take if a simple independent shot for peanuts becomes a mega-hit. Could also be a way for an actor to get a big or small extra return on the opening of his film, the same as having a percentage of the box office without sacrificing some of his fee for making the film.