Since I first heard of Hamilton the musical I have wanted to see it. So have my kids. And my staff.  I am a big Alexander Hamilton fan. There is a lot of demand to see this Broadway musical, and I confess that seeing it has become an obsession of mine. I was advised recently that I have included a few too many Hamilton references in the newsletter, and that I should concentrate more on the important issues of the day – market structure, market regulation, algorithmic trading, listed versus OTC markets, futures and options.

This is my rebuttal. The Hamilton phenomenon touches on all of the above.

There is a long line to get tickets for Hamilton, in fact the website says “currently, tickets to Hamilton on Broadway are extremely limited.” You are directed to enter your email to be notified when tickets are available. Not having to read between the lines, there is a limited supply of tickets and excess demand for tickets directly from the theater.

Of course, there are resellers and a secondary market for tickets too. Hamilton’s website recommends certain bona fide sites to avoid fraud. Fraud in an over the counter market is always a risk as you have counterparty risk. You want to use a known counterparty.

Ticketmaster is one of the firms listed. Ticketmaster can earn a huge premium for their service because they are a quality counterparty. Think of the service fee you pay to be in some ways the equivalent of a credit default swap, or simply counterparty risk insurance. You could buy a cheaper ticket, but it might be a fraud and you would lose all your investment.

If you wanted to buy a ticket for today’s show of Hamilton, Ticketmaster has the price at $1023 to $1400+. It is a market. There is a supply, but it takes a high price to get immediate delivery.

The term structure for Hamilton tickets is in backwardation – near term prices are higher than deferred prices. It looks like a futures market with a near term supply issue. Though I am no longer an active CTA and not currently making recommendations, I can say the roll yield on Hamilton would outperform anything in my current portfolio.

There are several ways to buy tickets directly from Hamilton including a digital lottery and a live lottery. In the digital lottery there is no advantage for being first in line, so leave your latency strategies at home. Once the lottery is held, you are notified by email. You have 60 minutes to reply.  This is kind of like doing a trade in the pit and having 60 minutes to check your trade. If you don’t check it during this time, the trade does not clear and ends up in the outtrade list. In the case of Hamilton tickets, unclaimed digital lottery tickets “will be sold to the cancellation link in person at the box office.”

The live lottery is kind of like the old butter market, but more of a true cash market. It is only for tickets on Wednesdays. There are 21 tickets sold for the front row and it is a one-lot market, one entry per person. The good news is this market price is just $10 per ticket, but that makes the demand even greater for the limited supply. Of course, you have to be in person for the live lottery, which I guess is why that call it “live.”

The secondary market is a classic case of arbitrage.  Ticket brokers have bought the tickets months out at cheaper prices and sell them at the much higher free market price, especially as the market gets closer to the delivery or performance day, i.e, the inverted market. Ticket brokers understand the system, or algorithm for ticket sales, better than the average Joe. As high volume customers, ticket conglomerates can be thought of as IPO participants, jumping in among the underwriters and selling in the free market.

Some of the high near term prices certainly pay the ticket brokers for their carrying cost of holding the tickets, but also for their demand risk. Should the brokers not be able to sell the tickets for the performance, they lose their investment.

In some senses then the ticket brokers are buying options. The cost is the premium and the expiration is the day of the performance. Unsold tickets are essentially options that expire out of the money. But premiums, or prices are higher nearer the expiration, except last minute sales are probably at fire sale prices, assuming that happens. I doubt it happens much given the excessive demand for tickets.

The Standard and Premium tickets for Hamilton are sold out and you have to register for updates. These are months or days in the terms of tickets that are limit up. You just can’t buy the tickets at the daily limit prices offered by Hamilton. There is no selling, but in this case there is only one seller. Ticket sales could also be considered like an IPO. Register your interest for the days and times and when the day comes you will be part of the lottery to decide who gets the allocation.

It is in the secondary market that market clearing prices are really set. What are Hamilton tickets worth? That is a great question, but you have to make an over the counter trade with a limited number of trusted counterparties to find out. How many quotes will the CFTC require before we can make an OTC Hamilton ticket trade? The lack of quote competition hurts price discovery.

Or maybe it does not. Maybe these tickets are worth every penny of the $1000+ cost for them. I know a lot of people who want to see this play. The good news is it is coming to Chicago starting in September. Of course there are ticket schemes for Chicago too, one of which is to become a season ticket subscriber. This is a whole other market structure that just reminds of me of the CDOs put together by the banks. Don’t worry about the tickets to Matilda the Musical, you will make up in your Hamilton for any losses on your Matilda.

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