BOCA RATON, Florida (Reuters) - If start-up Media Derivatives and broker dealer Cantor Fitzgerald have their way, investors may soon be able to place bets on the box office showing of summer blockbuster “Iron Man 2.”
Media Derivatives, a division of Veriana Networks, and Cantor are racing to set up the first U.S. exchanges to offer futures on movie box office receipts.
Though the concept has been kicked around for a decade, both say they are closing in on their goal of offering hedging — and speculation — instruments to investors and movie studios wary of audience fickleness and box office volatility.
“It’s the right place and right time to build an exchange,” said Veriana CEO Robert Swagger. While other futures exchange start-ups have largely tried to wrest market share from existing exchanges, he said, Trend Exchange has a better chance of succeeding because it is an entirely new market.
The rush to offer futures could allow Hollywood studios to lessen the pain from a box office flop. The latest plans come as global box office rose to nearly $30 billion last year.
Hollywood studios often bring in partners to invest in their movies and minimize their risk. A futures market could give producers another measure of protection.
Media Derivatives’ Trend Exchange, based in Scottsdale, Arizona, is slated to get the green light from the Commodity Futures Trading Commission on March 24, and plans to begin trading by midyear, Swagger said in an interview on Wednesday on the sidelines of the annual Futures Industry Association conference in Boca Raton, Florida.
Veriana plans to target institutional investors.
Cantor Fitzgerald has regulatory leave to start funding accounts on March 15, and plans to begin trading seven days a week on April 20, Cantor Exchange president Rich Jaycobs said on the sidelines of the same conference.
As an example of how it would work, if the expected box office revenue of a film is $170 million, an investor could buy a futures contract for $170 and, if the movie does better than expected, could sell at a higher price, Cantor said.
The idea of creating a Hollywood futures market has been around at least a decade. In 1996, a website called The Hollywood Stock Exchange was started where participants could invest fake dollars on box office outcomes. A division of Cantor Fitzgerald bought the site in 2001.
At the time, a source said Cantor was working on launching movie futures. In late 2008, the company announced it planned to list box office receipt contracts on its Cantor Exchange in the first quarter of 2009 — but those plans were delayed.
That was partly because getting U.S. government regulatory approval for a box office futures market has been a challenge.
The U.S. and Canada box office crossed the $10 billion mark for the first time in 2009. News Corp studio Twentieth Century Fox’s 3-D movie “Avatar” made a record-shattering $2.6 billion worldwide. The Walt Disney Co’s “Alice in Wonderland,” also in 3-D, beat “Avatar’s” opening numbers by making $116 million from Friday through Sunday.
But as DVD sales — a sector that had previously sustained the industry — declined 13 percent, Hollywood studios released 12 percent fewer movies in 2009 than in 2008.
At least some of the drop in U.S. film production is due to the constriction in credit after the financial crisis. The availability of futures contracts to hedge risk could encourage financiers to reverse that trend, Swagger said.
TrendEx will clear through Minneapolis Grain Exchange using a traditional futures-exchange structure, he said. Cantor will self-clear, using prefunded accounts.
While the film industry is small by commodity futures markets standards, having two exchanges in such a small space could benefit both, as traders try to profit on any price differences between the two markets, Jaycobs said.
Trend Exchange didn’t provide any details on the contracts it plans to offer. Cantor plans to offer contracts valued at one-millionth of a film’s cumulative four-week box office take, making it much more accessible to a retail trader than a typical futures contract.
Editing by Edwin Chan and Gary Hill