Are movie box office futures, the likes of which the Cantor Exchange proposes to make a market in, a bad, dangerous thing that ought to be banned?We’re already on record as being really psyched about the chance to bet on box office outcomes. Weighing in against them today is Heidi Moore writing for The Big Money, who attempts to explain why they’re a bad, dangerous idea.
On her side is Max Keiser*, the former broker, and uber-provocative doom monger who happened to have created the Hollywood Stock Exchange, which was bought by Cantor Fitzgerald, and whose platform forms the essence of the Cantor Exchange.
Max Keiser is unhappy. “I feel like Robert Oppenheimer. I invented something and it destroyed civilisation.”
Keiser, unlike Oppenheimer, didn’t have access to atomic bombs. His lethal weapon is more the financial kind, and after a long hibernation it has become the root of this year’s biggest controversy in Tinseltown: an exchange on which traders could bet on the performance of movies. What Keiser created along with Michael Burns in 1996 was the Hollywood Stock Exchange, a virtual technology where over 350,000 registered players traded shares of movies and celebrities using fake dollars. If Congress approves the idea, real trading should go live on exchange as soon as June 28—with real money.
That’s a delicious lede, but is it remotely plausible that box office futures could be the next financial atomic bomb, a la synthetic CDOs? No. No no no.
Felix Salmon has already pointed out one problem, which is that exchange-traded derivatives have never harmed anyone, but to be honest, Salmon used kid gloves in addressing this argument so let’s go further.
For this new financial product to become an atomic-bomb proportion problem (or even an Enron-proportion problem, as Keiser alludes to later in the article) you’d need some kind of bubble, some mechanism by which investors believe they can make more and more and more money on film derivatives, before the house comes tumbling down.
But that couldn’t possibly happen here for a few reasons. The first is that pricing of the futures is tightly connected to actual box office receipts (in fact, each contract will end at the four-weekend box office haul) and thus it would be absolutely impossible for pricing to be come ungrounded from reality. Unlike a house, where the price could spiral to several multiples of the monthly rent (price-to-rent being a common valuation metric), a box office future is by definition tethered to reality.
What’s more, the film business is HIGHLY unpredictable, and that’s a good thing. Films that look like sure things frequently turn into big-loss bombs, and sleepers with no-name casts become huge hits from time to time. This strongly mitigates against a speculative mania, because the underlying is so radically undependable. (If you want to know more about this, we HIGHLY recommend reading Hollywood Economics by Art De Vany, all about the radical uncertainty of box office results.)
This is the exact opposite of, say, housing, where over the course of a few decades investors were lulled into believing they were a sure thing — they were lulled so intensely, that even in the very-latest stages of the bubble, investors poured billions into housing-related assets on the belief that price appreciation was a sure thing.
Rather than seeing box-office futures as some Franken-derivative, they’re really not that much different than, say, lumber futures (and we don’t hear anyone talking about how lumber futures pose systemic risk). But actually they’re even safer than lumber, because you could, in theory, have a lumber bubble. You could have a scenario where investors horde lumber on the bet of future price appreciation, but you can’t have that with films because films aren’t a commodity or an asset class. Some will go up; some will go down.
What’s really funny about Heidi Moore’s piece in The Big Money is that she doesn’t even try to explain how these futures could pose systemic risk. After starting with all this bluster about atomic bombs, and the next AIG, all the article does is bring up the risk of manipulation, insider trading, and a possible negative effect on the film industry.
And sure, we could see there being some of that (though all these risk exist in every financial market, and the lumber industry gets along fine). But where is the explanation of how a financial weapon of mass destruction is at hand? The article never gets around to backing up that claim.
Of course, it all could be moot. The current financial reform bill as it’s currently written would outlaw these futures, so we may not get a chance to put any of this into practice. This won’t be a huge loss in the end, but if the ban is the result of derivative scaremongering that’s not based in a realistic sense of the threats, then that’s too bad.
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