Tuesday, March 30, 2010

The latest speculative disaster: Box Office Futures!

Amazingly, as if the current $1,500,000,000,000,000 global derivatives “market” is not adequately irresponsible, fanciful, and insulting in itself, we are actually standing on the cusp of removing yet more blocks from the bottom of this economic Jenga tower, thanks to an another brilliant idea by the ever-creative fiatists. This one is not a bundle of toxic subprime mortgage-pieces magically granted AAA status; not a handful of Greek paper; not a bucket of Duetsche Banks’ gold ETN’s. No, those are soooo 2007! Now way--get with the program, man, it’s time for the latest, greatest, sure-fire investment that’s gonna make us all of gazillion dollars: its time for Box office futures!

I kid you not. Very soon—soon as in weeks--the CFTC will likely grant a major investment bank the authority to host a futures exchange market for trading contracts based on domestic box office revenue. The firm is
Cantor Fitzgerald, an established Wall Street player in debt/equity brokerage, investment banking, securities dealings, and especially market data. You can bet they have a carbon trading arm: CantoCO2e. And now they want a Hollywood scheme.

The prototype for the deal has been around now for over decade, though it has been a roller coaster decade.
Max Keiser (yeah, that Max Keiser who you hear on Alex Jones and see in Fall of the Republic!) and some partners invented a virtual, web-based box office futures trading platform in the late 1990's with the goal of predicting box office performance. The timing on it was perfect, considering the .com bubble at the time, but it was only a virtual system--no real money, only "Hollywood dollars." They called it the Hollywood Stock Exchange (HSX). At its peak, Keiser was on television predicting movie performances, and producers were getting quite upset about these hot-shots telling them (and the audience) what a particular movie was going to gross before it was even released. But the platform proved an excellent predictor of revenue, perhaps due to its huge, enthusiatic base. At its peak in 1999, the HSX had investors and companies lining up with millions to get a piece of it, and an IPO was the goal. The .com crash quickly quelled that goal, and the company lost nearly all of its paper value. Enter Cantor Fitzgerald. In 2001, Cantor bought the company and has been operating it since.

Cantor's virtual
Hollywood Stock Exchange (HSX) has been up for almost a decade now. Since its inception, HSX has had millions of traders, and has just under 1 million today. That's a lot of experienced virtual traders who might be willing to start risking real money. As it stands now, the HSX is still a vitual money trading scheme where people can join up and get a free 2 million "Hollywood dollars" with which to trade. You can apparently win prizes, but again, no real money changes hands. Cantor holds patents on the exchange and exchange processes, which they probably acquired from Keiser’s company when they bought the exchange. Personally, I had never heard of this exchange, but I don't, exactly follow movies. I follow commodities. I know about the ICE Futures for Tropical Winds, but I wasn't watching the movie futures. So this is my crash course, because the virtual HSX is about to go real Cantor Exchange.

Cantor Fitzgerald is expecting the CFTC the okay their creation by April 20. It will be called the "Domestic Box Office Receipt Movie Futures" contract, or DBOR (DBOR--will this be pronounced as de-bore? As in, to make us not "bored" anymore? Is that a Fruedian slip or what?!). It will be traded on the Cantor Exchange (CX). Click here for the
contract rules book (pdf) that Cantor submitted to CFTC. Below are some choice parts:

"Chapter II-1-(a) Pursuant to each DBOR Contract entered into through the Exchange, the seller agrees to sell to the purchaser, and the purchaser agrees to purchase from the seller, a specified portion of an identified film title’s DBOR, as measured by the sum of the daily box office receipts in the U.S. and Canada, in accordance with these Rules, during the first four weeks after the film title’s initial release (such contract a “DBOR Contract”).

"Chapter II-2-The unit size of each DBOR Contract will be the aggregate DBOR during the Final Settlement Period for the relevant underlying film title, divided by the contract divisor of 1,000,000. Therefore, each DBOR Contract will represent 1/1,000,000th of the aggregate DBOR during the Final Settlement Period; a $1,000,000 change in revenues will cause a $1.00 change in the value of a Contract. The method of determining the Final Settlement Price is further described in Rule IV-9(a)."

"Chapter II-6-(c) Entities that are engaged in hedging activities through the use of short positions in DBOR Contracts, and Market Makers, may be granted hedge exemptions that exceed the short side speculative position limits by application to the Exchange; provided, however, that no short side hedge exemptions will be granted that would permit sale of more than 30% of the underlying position on which such hedge exemption is based and provided further that under no circumstances shall any hedge exemption be granted that would permit a Participant to hold a position exceeding 300,000 DBOR Contracts. Commercial entities eligible for short side hedge exemptions include (but are not necessarily limited to) film studios, film funds or other investors in films. Participants that are engaged in hedging activities through the use of long positions in DBOR Contracts, and Market Makers, may be granted hedge exemptions that exceed the long side speculative position limits by application to the Exchange. Any application for hedge exemptions made under this Rule shall include by any information or supporting material prescribed or reasonably requested by the Exchange, and shall include such facts as may be necessary to demonstrate the applicant's need to use DBOR Contracts for hedging purposes."

"Chapter IV-2-(a) The Exchange’s DBOR Contract market (excluding the Pre-Opening Auction) is a continuous (seven days a week, 24 hours each day), first-in first-out, two-way, limit order book, as described in Rule IV-3 below. Orders will be accepted in price/time priority effective 9:30 A.M. on the First Trading Day. Continuous trading of a DBOR Contract in this manner commences immediately following the close of its Pre-Opening Auction at 9:30 A.M. on the First Trading Day and terminates at the End of Trading on the Last Trading Day.

"Chapter IV-6- (b) On each Trading Day, the amount by which the price of a DBOR Contract may increase or decrease is limited to an amount equal to 10% of its prior day’s Settlement Price rounded to the next highest 0.5, which in no event will be less than 2.5, provided that the Exchange shall have the authority, under extraordinary market circumstances, to set daily price limits at different levels if, in the reasonable judgment of the Exchange, such action is warranted for the protection of the market and Participants."

"Chapter IV-12-(a) Subsequent to the commencement of the Pre-Opening Auction with respect to any DBOR Contract, any person in possession of Material Non-Public Information regarding the relevant film title will be prohibited from trading in DBOR Contracts with respect to such title.
(b) Notwithstanding anything to the contrary in these DBOR Contract Rules, the prohibitions on trading described in Rule IV-12(a) will not supersede any applicable prohibitions on fraud and manipulation, whether such prohibitions are prescribed by law, regulation or the Rules of the Exchange or the Rules of the Clearinghouse. The Exchange and the Clearinghouse each retain the right to take any appropriate disciplinary actions against Participants as permitted by the Rules of the Exchange or the Rules of the Clearinghouse, as applicable."

It reads like a regular future contract rule book--except for the fact that it is talking about movie revenues! Yes, I'm sure there will be no such need for "appropriate disciplinary actions against Participants" references in IV-12-(b), because I can't possibly see anybody finding a way to add fraud to this! Oh man, I can't even believe I'm writing about a futures contract on Hollywood box office reciepts--excuse me, I mean DBOR’s--but I am.

As you can see from the contract, much of it is very similar to another other futures contracts. The biggest difference is that you're betting on "movie commodities" that will disappear from trading after a certain period of time. It is very much like the sports betting: the game will be over soon, in other words. The contracts are limited by time. This is a huge difference from something like copper, where trading is building on previous years of data and looking out years to the future.

These DBOR contracts will be announced 6 months in advance of the expected opening day of the film (aka First Trading Day) to start the price discovery process. If there are delays, I guess that's just going to happen. The DBOR futures contracts themselves are one-one-millionth of the buyer's predicted revenue for the film. This
article explains it nicely:

"This exchange will enable the trading of contracts based on a movie's first four weeks of domestic box office sales. Each contract will be priced at one-millionth of the ticket sales estimate. So a contract trades for $100 if it predicts a $100 million box office gross. A prediction of $150 million in ticket sales would trade for $150, etc. If the movie grosses more, the contract increases proportionally, if it comes in short of expectations, the contract drops in value. The speculation will begin six months before a movie opens and will continue through the first four weeks at the box office."

It is that last part that is just flashing "DANGER!!" to me (beside the fact that this is MOVIES!)--six months of "speculation"? That's a very unique thing--there's nothing else in the futures world that just comes into existence, is speculated on for six months, reaches an actual price, and then disappears in four weeks. The speculation part is danger...especially when you combine it with these quotes:

"Richard Jaycobs, president of the Cantor Exchange, says he expects most of the investors will be people already familiar with the vagaries of the film industry, including producers and distributors who want to hedge against their investment in a particular film. However, anyone may invest and he says the "public response to this product has been very positive."" (

“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.” (
different article)

The last thing we need the public getting into is nationwide, 24-hr movie "DBOR" gambling. And, as it is a futures contract, yes, margins are fine! In fact, if it is like any of the other futures contracts, margin trading will be the base, because the whole investor/speculator attraction of a futures contract is the leverage you can get on swings using margins. DBOR Margins must be secured through a clearinghouse, and cash, Treasuries, or "other non-cash assets that may be approved by the Clearninghouse from time to time" are eligible collateral for against the margin. That last "asset class" is interesting--we can only guess what will end up as "collateral" in these margin accounts if "non-cash assets that may be approved by the Clearinghouse from time to time" is the standard. But hey, anyone who plays this game gets exactly what they deserve!

You can check it all out here, at Cantor's flashy new "Cantor Exchange" (CX) DBOR site:
http://www.cantorexchange.com/. In fact, you can even start practice trading DBOR contracts right now! Yes, to introduce everyone to the joys of blowing your entire paycheck on a Box Office bet, the CX is currently running the "It Pays to Practice!" Promotion. Sign up free and get $10,000 fake dollars to start trading now! Whatever you're left with, Cantor will give you $10 real dollars for every $1000 fake ones you have left after March 31, and you'll be ready to go when the real market opens April 20, where you will promptly lose your rent, phone bill, and electricity bill money! Cantor says: "Now, with Cantor Exchange, you can do what you love to do - trade on box office revenues - for real money!" (Oh, yes, this is just so great...I can't see any problems with this at all...oh my gosh, we are so screwed!)

So come April 20, we will likely have Cantor's CX streaming us live, 24-hr DBOR contract prices. With a CFTC like the one we have, I'd be stunned if they didn't approve it. After all, it will boost our economy, right? Cantor will likely be the first--but they won't likely be the last. In Sept 2009, another company called
Media Derivatives, applied to the CFTC to launch a box office revenues trading platform of their own, called the MDEX. Why have one death-nail when you can have two?

By the way, Cantor was
fined half a million bucks in 1997 by the CFTC, and agreed to an entry that it "aided and abetted fraud and registration violations" in a case where "although Cantor became aware that VFS falsely represented the ownership of a securities trading account VFS had opened in its own name, Cantor allowed the account to be traded in VFS' name. The account was actually owned by a commodity pool, the order finds. The order also finds that Cantor failed to determine the ownership of the VFS account, and failed to obtain the trading authority needed to allow VFS to enter trades in this account. In addition, the order finds that Cantor assisted VFS in obtaining $950,000 to which VFS was not entitled by making wire transfer payments to First Republic Securities, a wholly owned subsidiary of VFS, out of customer funds held in the account at Cantor." That's from the CFTC report--but I'm sure they've spiffied-up their trading practices since then. They've been holding this potato for almost a decade now, and they are ready to go. They want this derivative machine a-movin.'

I don't know what, but Cantor is definitely up to something. Maybe they are tired of masquerading trading as an "investment practice" and they are just outright advertizing it as gambling (which, of course, it is). Earlier this year, Cantor acquired the sports betting parts of three Las Vegas casinos-- Palazzo, the Venetian, and the new M Resort. That's right--sports betting. It is detailed in this
Wall Street Journal article, from which is a quote by a Cantor executive in charge of the operation. He said: "We wanted to turn gamblers into traders." Indeed. They call it Cantor Gaming.

Cantor Gaming has transformed the floors of these betting rooms into models of Wall Street trading floors. They opened bets on everything from win, to spread, to whether or not the quarterback would complete the next pass, or if the field-goal would be good or not. And no, I’m not exaggerating: Cantor allows mid-game bets and even bets on particular plays. The
article mentions the exposure that Cantor Gaming is accepting, which is certainly something worth noting!

"In the back room, Cantor employees plugged in data so a computer could spit out a new set of odds for the next play.
Cantor makes money by charging a small commission on bets. It tries not to take on any risk itself. That means that a bet that Miami is about to score has to be matched with the opposite wager. But frequently, there isn't the same amount of money on the other side of the bet, leaving Cantor exposed.

"Employees scan a risk-management chart—imported from trading platforms—which shows bets that Cantor still hasn't been able to match. When the charts show too much imbalance, Cantor gaming operator Andrew Patterson adjusts the odds to try to persuade gamblers to bet for the other team. "I manage risk," Mr. Patterson said. "If the pricing gets heavy on one side, I can adjust."

"While most Las Vegas sports books discourage professional betters because they expose the house to more risk, Cantor is trying to increase its gambling business to the point where it can use its software to create an efficient market. To do that, it must convince more casinos to sign up with Cantor's service."

Yeah, that's just great. I'm sure you've got it totally under control. Your sports and your movies. And, and in case your wondering, Cantor Fitzgerald itself is NOT publicly traded. It’s a private partnership. And one last thing about Cantor Fitzgerald, their Cantor Exchange, and the Domestic Box Office Revenues future contract: Cantor Fitzgerald, the mastermind behind this all, has been a primary dealer in the Federal Reserve System since
2006. (What do you mean you're not surprised?!)

So, now we just have to sit back and watch the CFTC okay this, and here we go. Witness a bubble, right before our eyes! There has been a lot of media attention about this over the last week that I detected during my searches. I found articles in the WSJ, NYT, CBC, CNBC, Reuters, Vanity Fair, LA Times, Business Wire, and many more. People are going to be hearing about this soon. Those million traders on the HSX surely already know about it. We'll see how much this magic trick drains from the American economy in the name of "financial innovation."

Isn’t this getting old?

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