The new way to make money from Hollywood

The new Hollywood Stock Exchange, where moviegoers can make (and lose) money from placing bets on a film's potential success

I made nearly $100 this week betting that The Girl with the Dragon Tattoo will take rather more than $5m at the US box office over the next few weeks. And I'm doing pretty well from my punt that Chloe, an erotic thriller starring Julianne Moore, will bomb when it opens across America this weekend. But no one seems to agree with me that Ca$h, a psychological thriller about a couple facing foreclosure on their Chicago home, starring Sean Bean, could be a surprise hit.

Welcome to the new Hollywood Stock Exchange, where moviegoers can make (and lose) money from placing bets on a film's potential success. And this isn't some two-bit internet betting outfit. Behind the launch is Cantor Fitzgerald, one of New York's biggest financial brokerages.

But I'm not about to become a day-trading movie mogul. For now, it's play money; a shadow portfolio of punts that won't make or lose any real cash. The exchange goes live next month, after winning approval from the U.S. Commodity Futures Trading Commission. It will be called DBOR (Domestic Box Office Receipts) Movie Futures, and it is trying to lure speculators with the tag line “trade what you know”.

The launch is aimed squarely at the U.S. public and movie industry, but Richard Jaycobs, President of Cantor Exchange, says he is examining ways in which U.K. investors can participate. Details of the new exchange won't emerge until closer to the launch but for now, movie fans can try their luck on the hsx.com website — it stands for Hollywood Stock Exchange — which is run by Cantor Fitzgerald and gives a flavour of what futures trading will be like when applied to the film industry.

Punters choose from a huge list of “movie stocks”, priced on the exchange according to market expectations of their box office success. Each $1 of the stock's price represents an expected $1m in box office receipts. For example, units in Hot Tub Time Machine, a sci-fi comedy opening this weekend in the U.S., were trading midweek at around $72; in other words, the market expects it to gross around $72m. If you buy it at $72 and it grosses more than that, you're in the money. If it takes less, you're out of pocket.

Think a film is over-hyped and will flop? The exchange lets speculators “short” or sell a movie. For example, Chloe was trading at $10.83 when I decided to short it last week. I admit I'm no movie buff: all I did was look up The Guardian's review (“a by-the-numbers drama, with no believable tension'') and hey, this isn't real money (yet). Maybe quite a few people in the U.S. have also read Peter Bradshaw's review because Chloe dropped to $9.66 on the exchange this week. This means that on paper, I've made some 10 per cent.

The final reckoning comes with the formal box office returns. These are based on total U.S. takings over four weeks for wide release films and 12 weeks for limited releases, after which they are delisted from the exchange. As Chloe is wide release, my punt is that it will make less than $10.83m over four weeks. Does this sound a bit too easy? Well, it turns out most users of hsx.com expected Avatar to flop, yet it went on to take $730m in the U.S. alone. If punters had put real money behind their bets, they could have been nursing huge losses, as shorting can magnify the downside.

Critics might be wondering at this point why Cantor is doing this. Is there really that much to be made from gullible punters who think they can outsmart Hollywood producers? In truth, the exchange has been designed for big studios to hedge their risks, in much the same way that farmers can take out forward contracts on everything from pork bellies to orange juice. And it comes at a time when, in spite of the success of Avatar, film producers are wary of falling DVD sales (down 12 per cent in the U.S. last year) and illegal downloads. “With the launch of the DBOR Movie Futures contract trading, movie distributors, exhibitors, producers, and investment entities will have an unprecedented public market to create liquidity and hedge their daily business. The Cantor Exchange will provide a new component to the film finance formula to combat the uncertainties of the home video market and growing 3D marketplace,” says Andrew Wing, Chief Executive of Cantor Entertainment.

But the new exchange is not without its critics. Writing in the Washington Post, Steven Pearlstein said: “If nothing else, the movie exchange is an obvious invitation to trading with insider information, allowing those who are actually producing a movie to bet on its outcome against outsiders who have never read the script, reviewed the dailies or seen the marketing budget.”

Cantor won't even have the market to itself. Veriana, a U.S. private investment group, is launching The Trend Exchange next month, although with a high minimum investment (contracts are expected to be priced from $100,000) it is aimed at institutions. Founder and Chief Executive Robert Swagger says: “By offering speculators and hedgers a market-based solution to transfer the considerable financial risks associated with major movie productions, The Trend Exchange will perform the same public service that futures exchanges have been providing to commercial users for nearly 200 years.”

It is backed by Ralph Winter, producer of the X-Men and Fantastic Four series of films.