Cantor Fitzgerald Revives Hollywood Stock Exchange Plans To Let Studios Bet Against Movies

from the seems-like-an-odd-time-to-announce-derivatives... dept

Boing Boing has a post that caught my eye about Cantor Fitzgerald's plan to offer bonds based on the performance of movies, basically allowing movie studios to "hedge" bets on the investments they make in certain movies. Now, in theory that could make a lot of sense, but as we've seen with the credit default swap market and the resulting financial meltdown, what starts as a "hedge" can often turn into something very different. Either way, it struck me as odd that any financial firm would be rolling out some new, high profile, product like this in the midst of so many questions about similar products. The Boing Boing post also includes a pointed criticism of the plan.

However, the story was also intriguing because in the back of my head I vaguely remembered that Cantor Fitzgerald had purchased the Hollywood Stock Exchange years back. HSX had been something of an early web success story -- getting people to bet on the success or failure of certain movies and actors -- but it had all been with play money. In wondering about this, I did a quick search here on Techdirt, and actually found a remarkably similar announcement from seven years ago, all about how Cantor Fitzgerald was getting ready to launch a real futures market for movies. Of course, even more noticeable was the date on that post: September 4th, 2001. That's exactly one week prior to September 11th, and the attack on the World Trade Center... where Cantor Fitzgerald was headquartered. 658 employees from the company died from the attack in one of the many tragic stories to come from that day. I'm not sure if the Hollywood futures market actually will do very well, but it's still interesting to see them revive this idea.

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  1. identicon
    Ethan Bauley, Dec 10th, 2008 @ 12:18am

    To be fair to CDS...

    "...what starts as a "hedge" can often turn into something very different."

    Ultimately, credit default swaps were a pretty straightforward hedge for owners of the underlying asset; to the best of my understanding, the fact that sellers didn't keep the reserves necessary to cover losses unwound everything.

    Anyways, great piece. It's humbling to be reminded of what happened at Cantor Fitzgerald. I remember being on the phone with a trader in the World Financial Center on that day, it was truly horrible.

    reply to this | link to this | view in thread ]

  2. identicon
    jerry, Dec 10th, 2008 @ 4:32am

    predicted by Mel Brooks?

    If you play it right, can you make more money with a bomb than a hit?

    reply to this | link to this | view in thread ]

  3. identicon
    Salim Fadhley, Dec 10th, 2008 @ 7:29am

    The office was destroyed

    Max Keiser - the brains behind the HSX has told this story on his own podcast: The offices were destroyed just before they were intending to go live. He would be dead if it had not been for his habit of turning up for work very late.


    reply to this | link to this | view in thread ]

  4. identicon
    VAD, Dec 10th, 2008 @ 7:50am

    bonds based on the performance of movies,

    "... Cantor Fitzgerald's plan to offer bonds based on the performance of movies, basically allowing movie studios to "hedge" bets on the investments they make in certain movies. ..."

    If memory serves me right, David Bowie did something like that with his early catalogue to leverage his buy of the later catalogue...

    reply to this | link to this | view in thread ]

  5. identicon
    Anon2, Dec 10th, 2008 @ 8:32pm

    Could be good

    It's a great idea in theory, but the devil's always in the details -- including how it is executed, and how well it is policed and regulated by whomever operates the exchange. Hedges are a valuable risk management tool, and a pretty fundamental aspect of capital markets. Swaps, futures contracts and the like, when used strictly as a hedge, are amazingly efficient means of spreading, sharing and exchanging different risks, at least when there is a reasonably well developed market and sufficient transparency paired with enforceable terms (e.g. the requirement that the counterparty must maintain adequate reserves to make good upon expiration of the swap if necessary).

    The problem with the CDS market was largely one of nearly zero transparency and fairly weak reserve requirements. Neither side could ever audit the other's financials to ensure the terms were being complied with, and that was unfortunately coupled with increasingly complex layers and webs of additional leveraging and hedging against those swaps, to such a degree that it would have been impossible to audit, evaluate and value them. In many cases, nobody even understood over time how this exponential hedge-upon-hedge approach affected their risk; there were just too many moving parts, too many variables, and too many greedy ignoramuses, to the point where all the highly talented quants, software and computer systems engineers, and tech people who occupied floors and floors inside some of these institutions could even remotely come up with a way to track and measure the actual risks to that institution. It was, quite literally, a house of cards -- an inverted house of cards, more accurately, which of course is even more precarious.

    I just hope that if this idea takes off, that Cantor, Fitz or whomever actually sets up and operates (and regulates) this market, establishes rules of the game that include intelligent restrictions and rules that either keep things as simple and straightforward a way as possible, or else an even more robust set of adequately policed rules that truly allow every market participant the ability to accurately model their risks. Given that the assets being capitalized are among the most risky around (lots of dogs for every film that actually makes it into the black, almost no way to do any reality-based projections, and an accounting system that is a perversion of the very notion of accounting), this is no small task.

    But I think it can, and probably should, be tried, at least on some small scale. If it works, there's not much reason to confine it to this one industry; it could be replicated, or expanded to include, a fair number of others. Greater liquidity combined with rational opportunities for risk management, if based in reality and on a functional system with enough transparency to allow for more accurate fixing of market prices by the participants, is for the most part, a highly desirable thing.

    reply to this | link to this | view in thread ]

  6. identicon
    Tashi, Dec 15th, 2008 @ 11:29am

    Re: predicted by Mel Brooks?

    Exactly. This is how Uwe Boll keeps getting work.

    reply to this | link to this | view in thread ]

  7. identicon
    James, Jan 26th, 2009 @ 12:08pm is sports alternative and working..

    This reminds me of a new company called You can use real money to buy and sell pro athletes just as you would a stock.. It's real money and is working.. (They just received $3.5m from Charles River Ventures). They spent a ton of money on legal up front though to make sure it is legitimate and legal from what I heard.

    I think this is a great idea and people who love movies now have a way to be more involved with their passion. Now, it's just a matter of getting them to market, which is always the real challenge.

    reply to this | link to this | view in thread ]

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