A lot of investors have been trying to make sense of the recent approval of the movie futures markets. This blog post attempts to clarify the current situation.
We know that there are currently two players in the movie futures exchange effort. Both companies, Veriana Networks and the Cantor Exchange, will require two approvals in order to actually trading in movie futures.
The first approval is to become what's known as a "Designated Contract Market" or DCM. The DCM approval allows you to be a market but only trade in approved commodities. This is a relatively straightforward process that tries to ensure that the company is viable and has resources to run a legitimate DCM.
And that's basically where we are now (as of April 20, 2010). Both Veriana Networks and the Cantor Exchange can be a contract market . . . but not for movie futures.
The second approval allows movie futures to be traded as a commodity (or futures contract).This is where the CFTC looks at the commodity contracts and, among other things, is making sure that movie futures are a legitimate hedging vehicle.
"Why does being a 'legitimiate hedging vehicle' matter?", you ask. It's because that's what makes a commodities market and that's what movie futures need to prove. Recall that in traditional commodities lingo, the market is composed of speculators and hedgers. This is necessary because a commodity contract is an agreement between two parties. The hedger is the person holding the commodity (in this case, the person making the movie) and the speculator is the investor (you and me) that is willing to take the other side of the contract, whether it's a long position or short position.
If you don't have the speculators and hedgers in place then you just have speculators making contracts against other speculators and that's just plain old gambling . . . and the government won't stand for that.
On April 20, 2010, the CFTC commissioner, Jill Sommers, issued a statement essentially approving the DCM for the Cantor Exchange. However, in that same statement, she expressed the desire to look at movie futures in the bigger context of, "event, prediction, or information markets" and is less favorable to looking at movie futures as an isolated commodity.
Unfortunately, it is of my opinion that this only indicates more delays ahead for the movie futures markets. There is a congressional committee meetng scheduled for April 22, 2010 and Veriana Networks has announced that June 7, 2010 is the earliest possible date for any trading. Both of those will be key dates and they're certainly in flux.
It will be an interesting next couple of months for movie futures markets and, along with you, we'll be watching closely.
