I was one of three programmers at HSX.com when Max was there, from 1997-2001. We learned a lot during that time, and I’m not surprised that it’s taken this long to get such markets approved, and that such approval has resulted in forces pushing to make them illegal.
At that time, a “real money” market was just a dream, the primary goal of which was to allow independent filmmakers to raise money for promising projects. That market never got much interest, for two reasons mentioned in this post and in the comments and one not yet mentioned:
1- Unlike pork bellies or light sweet crude, the quality of the resulting movie product is not directly related to the “quality” of the participants. Even if the movie the stock was associated with had a contract with Writer A, Director B, and Big-Draw Stars C, D, and E, and Marketing Firm F — you still could produce a bomb. Studios manage this risk by taking total hiring control, reading the script, watching dailies, and the like. You can do that with a small number of investors- you can’t easily distribute all that for shareholders. Sure, shareholders could buy and sell based on their judgement of what information is distributed, but to have an open market all this information (i.e., the proto-movie itself) must be given away. We built a product called VirtualProducer.com that explored these options, and produced “Shadow of the Vampire” under that aegis. From that experience, it does not work. However, clearly something *could* work- Microsoft faces similar quality-of-product debates, and it’s public.
2- Big studios currently control the entire market. Small independents find it difficult to enter the market because they don’t have the cash buffer to help absorb risk. Anything that reduces risk or spreads it out therefore acts to destabilize the hold the big studios have on the market. They will therefore act aggressively to ensure that full risk is borne by the filmmakers, because they are the only filmmakers than can easily do so. This may lower the overall quality of movies and therefore reduce the size of the market, but it increases the big studios hold on their share.
3- Individuals within the big studios see their only method of getting promoted is to take full responsibility for huge successes and to fully deflect responsibility for failures. The system that is in place is well designed through the evolution of millions of such decisions to give the individual decision makers exactly the means to do this. New markets such as these may make sense for the companies, but for the individuals they represent a risk that no one will take because it breaks the mold and so they MUST take full responsibility for a failure, while the market distributes responsibility for success. Just like Greenspan’s oversight, companies do not act in their best interest simply because the individual PEOPLE running the companies are acting in their own best interest. And they do not want the markets touching their movies.
So, those are the lessons I learned. I was just the programmer. Max was the markets guy. I think that in the end this sort of thing will get enough momentum (overseas, etc.) that it won’t matter much what people are concerned about. I do hope that such markets can be created. I think they may help make more interesting movies.
I disagree with Max that a prediction market quote can change perceptions that much.
No one can argue that the movie-making business is without risk or that there is no need for effective risk management tools. The potential introduction of innovative instruments for managing that risk should be applauded rather than criticized.
Via Max Keiser
Please, note that these allegations are made by left-wing people. Midas Oracle has not checked and does not endorse these allegations.
HOLLYWOOD: THE NEXT TARGET FOR SUBPRIME SPECULATION
Mother Jones has the story:
If you thought the mortgage-backed securities and other complex financial instruments that crashed the economy were risky, you’ll love Wall Street’s latest brainwave: a new financial market in which players can gamble on whether upcoming Hollywood movies will be blockbusters or bombs.
For years, Cantor Fitzgerald, a Wall Street investment firm, has been operating the “Hollywood Stock Exchange,” a fake-money game in which players trade “stocks” to bet on how films will do at the box office. Now Cantor could soon get government permission to make a real-money version of the game—a market in which players can gamble on the success or failure of, say, Pirates of the Caribbean 4. Critics are worried that this new market could be vulnerable to insider trading and create bizarre incentives for moviemakers—and that it will also enlarge the risky family of financial products that helped trigger the economic crisis. [More here >]
Last week, I carried a report that Cantor Fitzgerald, the firm that lost many people in the World Trade Center collapse, has been up to some shady business but I have been told there are many questions still unanswered about this firm. Below, a confidential report on the shenanigans, according to a source I trust:
Cantor Fitzgerald has not yet paid the HSX Holdings Inc. shareholders a penny for the “deal” that transpired in 2001.
A “transaction” occurred in 2001 –- that transferred HSX Holdings Inc. voting rights to Cantor –- giving the hundreds of investors –- who invested $40 mn. dollars into HSX from 1996 –- exactly NOTHING.
When queried by lawyers, Cantor claims they lost all the paper work in the 9/11 attacks (they moved the company from Santa Monica Ca. to the top floor of the WTT during the Spring of 2001).
What I know is that a board member of HSX –- Woody Knight of SBS (Scandinavian Broadcasting Service) –- engaged in a pre-arranged, third party transaction that passed voting control to Howard Lutnick at Cantor –- in exchange for $2 million in eSpeed stock (Cantor’s publicly listed entity at the time) that was immediately sold to ‘wash’ the sale.
Cantor is now going to launch ‘box office futures contracts’ based on intellectual property and technology they don’t have the rights to –- with the blessing of the CFTC.
According to my sources who are close to this –- the CFTC –- run by Gary Gensler –- a former Goldman guy (of course) –- took 25 mn. in ‘lobbying’ fees from Cantor to get these new contracts green lit. But did they do any due diligence? Did they spot the absence of any bona fide transaction between HSX and Cantor?
Does the world really need more weapons-of-mass-financial- destruction from the sickos on Wash. and the CFTC?
Why should we assume that Cantor will operate this market honestly when the circumstances of their “ownership” including the patented “Virtual Specialist” technology used for online CDA (Continuous Double Auction) technology, are dubious at best, if not outright fraud.
Will anyone be able to resist these new products that combine tinsel with wall st.?
Is this the new bubble the CFTC hopes will take people’s mind’s off the current spate of fraud on Wall St.?
Also, can you think of a market that is any easier to manipulate by insiders?
We understand that a former CEO of HSX got calls from people like Jeffrey Katzenberg asking to move prices of their projects up to change the perception in the market place (and media) and to free up more marketing dollars.
Just one example of many, many ways to game this market.
[…] I asked John Delaney and his tech team when I was doing my due diligence on InTrade a couple of years ago in Dublin – about the firm’s own participation in making markets – and the potential to ‘manage’ prices in ways that were outside of the normal price discovery mechanism. I came away from that meeting not convinced at all that adequate checks and balances were in place to protect against manipulation. […]
I am calling all my Deep Throats. Contact me. Tell me more.
Max says that the political prediction markets are “-routinely manipulated”- and we often see “-price rigging”-…-