Lights, Camera, Trade

Are you willing to risk your bets on Tom Cruise's next talk-show antic? Do you think the movie Harry Potter and the Order of Phoenix will be as successful as Harry Potter and the Goblet of Fire? Will Angelina Jolie's upcoming delivery make her less marketable?

Thanks to the Hollywood Stock Exchange (HSX), America's obsession with Hollywood has now become a proxy for Wall Street. Owned by Cantor Fitzgerald, the exchange gives aspiring moguls and cinema fans alike the opportunity to trade so-called star bonds, movie options and movie stocks. It also gives film investors a look at your tastes: in other words, it does for Hollywood what Intrade.com has done for elections and other events.

While the Hollywood Stock Exchange has somewhat of a silly pretense, it can mean windfalls for media investors. The HSX claims to have a good proxy of upcoming Hollywood events -- it did pick seven of the eight main Oscar winners this year -- and analysts and investors take it seriously. With a window into the next blockbuster hit, have investors found a way to make the volatile movie business a little less of a crapshoot?

The movie world, in which success is largely based on fads and capricious human interest, is often very difficult to maneuver. But that hasn't stopped Wall Street from trying. Wall Street's affinity for Tinseltown has grown over the past two years, and it isn't unusual to see some of the savviest investors showing up for popular movie launches at gatherings such as the Tribeca Film Festival and Sundance.

Venture capital funds, including Dune Capital and George Soros' funds, invest millions in movie start-ups. In September 2004 a consortium comprised of Sony (SNE Quote), Providence Equity Partners, Texas Pacific Group, Comcast Corporation (CMCSA Quote) and DLJ Merchant Banking placed the winning bid for Metro Goldwyn Mayer. Recently, interest in Hollywood has moved overseas, with the Lexington Film Fund backing early-stage products in the U.K., the Financial Times reported.

But a film's success is largely a hit-or-miss business, and that can lead to significant losses for investors. The HSX can help mitigate that risk.

"Avid movie fans love to play on the exchange," says Alex Costakis, managing director of the exchange. "It's a prediction market for the industry."

	Star Power
Source: Lester Cohen, WireImage.com

For example, star actors are vital ingredients of a movie's success. But these stars come with expensive price tags, and producers often find themselves stumped when trying to determine the right signing price. That expense can largely determine whether a movie is profitable or not.

The exchange shows the movie producers how much the market values a star. If Matt Damon's stock is falling, he might be a bargain -- or maybe his day in the limelight has passed. (Damon's shares have indeed been on a decline over the past week.)

Meanwhile, investors can also see what movies will hit blockbuster status on their opening weekend in the theaters -- the main factor that determines if a movie will be successful over its entire run. For example, Scary Movie 4, which debuted in theaters April 14, had shot up in value over the past few weeks in anticipation of its release. And over the weekend, the movie stole the top spot on the box office charts, raking in over $41 million. However, shares in Carmen Electra, a star in the movie, have posted a stagnant performance. Did the producers pay too much for her?

	Let's Go to the Movies

Hollywood fanatics using the exchange, which was founded in 1996, are on the rise. The company averages 50,000 trades a day for about 2,200 celebrity listings. To date, the company has about 1.4 million investors, and signs up about 250 new users daily.

Although the HSX doesn't disclose the identities of specific traders, it says that research firms such as Thomas Weisel Partners often contact the company to get information on movies that are produced by publicly traded firms such as Pixar(PIXR Quote).

The exchange itself isn't that far from Wall Street. The company has been owned by Cantor Fitzgerald since early 2001 and uses the trading platforms and back-office resources of Cantor. The traders are quite savvy about the Street, using optionslike trading and sophisticated charting techniques to cover their celebrity hedges.

Anybody can sign up for free to trade on the HSX, and traders are automatically given H$2 million (Hollywood dollars, that is). And even for those not interested in Wall Street, the exchange can be a good way for fans to vent their distaste for celebrity antics. "It's a Web site where people can come to play the game," says Costakis.

The Hollywood ties also run deep. One of HSX's executives, Jim Lefkowitz, a former CAA Hollywood agent, was recently named in a US Weekly story as the target of assault allegations made by Paula Abdul. In typical Hollywood fashion, the gossip scandal has all parties scrambling. A Cantor spokesman said, "We are very supportive of Jim," while Lefkowitz's lawyer called the allegations "completely outrageous and utterly false."