May 26, 2010
News broke today about a Disney secretary with a yen for Stella McCartney handbags who was arrested by the FBI (along with her boyfriend) for allegedly trying to sell insider information to hedge funds about the company’s quarterly reports before the information became public. Not surprisingly, it took only a few hours after the news broke for the first story to appear suggesting that the saga of the Disney secretary was new fodder for those opposing movie box office futures.
Of course, the saga of the handbag-loving Disney secretary has nothing to do with box office futures. But for those who see connections that may (or may not) exist, the reasoning goes something like this:
1. Inside information about movies, whether from test screenings or studio hallways, will become valuable for those trying to profit on movie futures contracts.
2. Encouraging people to try and profit from insider information is a bad idea, and those who engage in such activity will disrupt the business and harm the industry.
3. The saga of the Disney secretary exemplifies what may happen on a broader scale if box office futures are approved for trading.
4. We should ban movie box office futures to avoid these problems and the disruption/harm they may cause the industry.
Excuse me for being thick, but I don’t get it. We all know people may try to profit from movie futures by gaining access to inside information. Does that mean they should be banned? If banning box office futures is justified to avoid insider trading problems, we might as well ban the stock market and every other investment vehicle, since they all offer the opportunity to profit by gaining access to non-public info.
Insider trading is a good argument for insider trading laws (and conflict-of-interest rules), not banning financial products with legitimate purposes, whether to raise capital, participate in ownership, hedge investments or otherwise. Financial markets can’t be pure because people aren’t pure. That’s why we have laws and regulations to smooth out the problems. Besides, as one Reuters financial blogger notes:
“Derivatives markets are largely exempt from insider-trading rules to begin with, since derivatives aren’t securities. When people find out information about what’s going on with a movie, they might well trade on that information. Which means, in turn, that the box-office futures will be that much more accurate as a prediction of how well the movie is going to do.” [More arguments for box-office futures-Felix Salmon (5.17.10)]
Of course, Cantor Exchange and MDEX, the two companies with applications pending for movie box office revenue contracts have included in their futures contracts provisions requiring firewalls be set up by the movie studios to separate those who trade in movie futures from employees with access to box office revenue numbers, and prohibit certain people with non-public info from trading in such contracts, even though insider trading laws don’t apply. [See e.g. Cantor's Domestic Box Office Receipt, Contract Terms and Conditions, Section II-18 and II-19]
I’m not saying there aren’t reasonable arguments against box office futures. But let’s not rely on questionable logic and flawed analogies to throw out the baby with the bath water.
As for the Disney secretary, she reportedly planned to use some of the profits from the alleged scheme to purchase one of Stella’s $700 creations.
For background: FBI arrests two in Disney insider trading probe (New York Post-5.26.10)
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{ 2 comments… read them below or add one }
I don’t know if you’re thick, but you do seem a bit slow. Just because something can be created doesn’t mean it should be. The MPAA and IFTA represent about 95% of the films that would subject to this market. Yet they (and the theater owners trade assn) oppose it. So who are the beneficiaries? It’s the guys making the book. They handle the action and get a cut from both sides of the bet. Cantor already has a company called Cantor Gaming. They have a great system that allows you to lay bets throughout a game through ever-changing odds. Cantor Futures is modeled on Cantor Gaming. Swagger and Jaycobs actually had the gall to suggest that the film industry needed new and exotic derivitive instruments to help recover from the recession…… which was largely driven by exotic derivitive instruments. WTF? These markets have NO insider trading rules, which means the game is even easier to rig. When contrasting contracts for light sweet crude and a single motion picture, even Mr Magoo can see the exaggerated potential for abuse. Cantor and MDEX have advocated creating a “firewall” in the film companies. Well who is going to pay for that? Who is going to manage that? And if some designer handbag-greedy secretary breaches the firewall, who is liable? Cantor and MDEX? I don’t think so.
So at the end of the day, Cantor and MDEX want to impose costs, obligations and liability on the studios to create a market that the studios don’t want. Unless you’re getting a piece of the action I don’t see how you can possibly view this proposal to be worthwhile.
I wont repeat myself but I have responded to similar points on the other thread (You may even be Realist), but in short: (i) educate yourself as to what caused the financial crisis and how futures contracts played no part and most importantly why their design ensures they dont play a part in future; and (ii) educate yourself as to how the information barrier works!…and who is liable for misusing insider info etc…if the studio dont misuse it, they are not on the hook.
Saying the MPAA and IFTA represents 95% of the films on this market is another classic over simplification that gets thrown about on this issue. It ignores several key players associated with those films that could benefit from such products: the third party financiers who actually put up the money for many studio films, the downstream rights buyers who could hedge their risk using such products, marketing tie ins who lose tons when a film bombs…on and on…
I can almost understand why studios object: they are posessive and cant get their head around anyone making money off their titles. Its short sighted and counter productive but I can almost understand. It makes no sense to me why theatre chains object to this: they could benefit hugely: the studios force cr*ppy tites on to them and they have no control over how well that film will do: hedging their position would be a great opportunity to allay the risks with occupying screens for cr*p films. I expect they are trying to stay on the right side of the MPAA who I note showed little regard for the theare chains concerns when promoting the recent direct to tv film releases …