Betting On Alice, Avatar, and Other Film Gambits

(MoneyWatch) 
The chance to gamble on and profit from the performance of films and celebrities in their opening weeks at the box office sounds like potentially fertile ground for Hollywood insider trading.

All the same, regulators say on March 15, investors can begin registering the virtual shares they trade on Hollywood Stock Exchange, HSX.com, for the real thing. Cantor Futures Exchange has operated HSX in a nine-year trial run (really!) since Cantor Fitzgerald acquired the struggling start-up in 2001.

Investors will actively trade movie futures contracts based on domestic box office receipts (DBOR) sometime after April 20, when Cantor expects final regulatory approval from the Commodity Futures Trading Commission.

The premise seems simple enough. Investors will trade $1 for every $1 million they expect a movie to generate its opening weeks in domestic theaters six months prior to the premiere. Cantor warns of volatility, saying that traders betting their virtual "Hollywood dollars" against Avatar's success lost big time. Tim Burton's 3D blockbuster Alice in Wonderland, which initially traded as low as $115 a share, is at $287 following its record-breaking premiere. So much for the wisdom of crowds.

But the new exchange also represents a way for persons familiar with making, marketing and financing films to cash in on what they know -- that the public does not. For instance, a movie studio or distribution executive can "short" a contract on a film expected to perform poorly to minimize their losses. Their trading actions can impact other trades.

Because the exchange functions like most other futures markets, a HSX trader can bet $100 on a film expected to open with $100 million in box office receipts. If the film opener grosses $150 million, the trader makes $50 on his bet. If the trader shorts his contract, and the movie only opens with $50 million in ticket sales, he makes $50.

Persons involved in film production, promotion and distribution could reap rewards from betting against their own projects, although Cantor is limiting the amount an individual or company can hedge.

Still, it is difficult to dismiss the potential for conflict of interest and insider trading issues. Information about how Cantor will deal with this is too limited, unclear. Cantor Exchange president Richard Jaycobs maintains it has stiff rules, procedures, policies and computer programs in place to detect any abusive behavior.

Cantor Entertainment CEO Andrew Wing is pitching the exchange as "a new component into the film finance formula to combat the uncertainties of the home video market and the growing 3D marketplace." That means the studios owned by multinational media conglomerates such as News Corp., Time Warner and Walt Disney Co. - and everyone they do business with - now have an "unprecedented public market to create liquidity and hedge their daily business activities." Filmed entertainment is a primary business whose cyclical ups and downs can have a dramatic bottom line impact.

HSX's extensive resources provide a deep dive into financial and anecdotal business information about movies, television programs and stars as well as industry IPOs, movie funds and derivatives. One of the more intriguing HSX fan site is Project Genome, a compilation of sequential data leading up to a film's release.

Who knew that Orlando Bloom, trading under the symbol OBLOO, would be up one percent this morning to $101.15 a share or that Steven Spielberg (SSPIE) would be down 63 cents to $159.66 a share?!

It will be interesting to see how quickly the exchange grows beyond its existing 200,000 active virtual traders. On the surface, Cantor is touting its HSX as a way for moviegoers to have fun and make money betting on their favorite stars and films. In reality, there HSX could become a high-profile industry's in-house trading floor.

In these times of intense focus on insider trading, market manipulation and financial regulatory reform, this real-life Hollywood bet has the possibility of big screen scandal written all over it.