First, a hearty congratulations to Robert Swagger and Trend Exchange. Along with the Cantor Exchange folks, they have run quite a gauntlet, and although there remains a tremendous obstacle in the form of the Lincoln amendment, I consider these exchanges to have already accomplished a great deal.
In its approval of Trend Exchange and preceding statements, the CFTC has confirmed a very broad definition of “-commodity”- that includes “-event”- contracts. The old debate about whether or not the CFTC has jurisdiction over “-prediction markets”- has been decided for now. Yet, there is considerable dissent within the Commission. Commissioners Chilton and Sommers have expressed disapproval that the Commission did not first address the general questions raised in the 2008 Concept Release. To this point, given the very broad definition of “-commodity,”- it now seems that Intrade and online sports exchanges could be in violation of the Commodity Exchange Act. The Commission does not consider an “-economic purpose test”- in the contract review process, and there is no statutory basis for such a test being used in jurisdictional determinations. Perhaps as a matter of practice, in accordance with the spirit of the Act, the Commission is considering such a test for jurisdicitional questions as I suggested in my Concept Release comments (surprisingly cited by the MPAA group). Otherwise, it seems inconsistent that exchange-traded sports bets, for example, would not also be considered commodities and be subject to the Act.
As a whole, the Commission has apparently decided to defer such questions and focus on specific techniques for ensuring that the new contracts fulfill the Act from the standpoints of manipulation and fair trading. To these ends, the CFTC will require, “-entities and individuals who control a film’s marketing budget, release date or opening screen number to provide the Exchange with information regarding such decisions whenever that entity or individual holds a position of 1,000 or more contracts.”- Additionally, the Commission will require a “-firewall”- within studios and distributors, and has restricted certain employees from trading altogether. These are procedures that I had recommended for event contracts, but they are relatively novel mechanisms in the commodities world. Whether or not the CFTC would agree to support special trading restrictions was the pivotal question in whether the contracts would be approved. I applaud the principled, politically independent thinking of the Commission and the can-do attitude of the Market Oversight Division —- though some headline risk has been assumed here if something should eventually fall through the cracks.
“-In a 3-2 vote, the Commodity Futures Trading Commission on Monday afternoon approved a contract created by the company Media Derivatives that would allow traders to bet on the gross receipts that a movie pulls in during its opening weekend.”-
– “-If we approve these types of things on the arguments posed in favor of them, we could be approving things like death pools or terrorism contracts, something Congress surely never intended.”-
A Case for Movie Futures –- by Buzz Potamkin, former studio executive and producer, in the biz for 40+ years, now a consultant
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.