Pipe Dream: Marijuana's Potential Move to Wall Street

Could weed be the next great commodity in the capital markets?

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Dan wonders whether institutional traders will take a hit of marijuana trading.

One of the best ways to judge the value of a product is by looking at who's involved. When I evaluate the worth of a new trend in the industry, I look at the players in the mix. Case in point: the blockchain phenomenon. If it weren't for the involvement of some of the biggest banks and exchanges in the space, we'd likely not hear much about distributed ledger technology.

So when I first saw a Bloomberg story with the headline, "Some Wall Street Vets Are Betting On a Weed Exchange," I was skeptical. These types of headlines are classic clickbait. I should know; I've written plenty of them.

Still, because I'm a sucker, I clicked on the link and checked it out. The story examines Amercanex Corp., an electronic marketplace for buying and selling cannabis for wholesale and retail distributors in Colorado and California. In short, Amercanex is a commodities exchange for weed.

Big Names

What jumped out to me about Amercanex were the people involved in it. Steve Janjic, who previously served as a foreign-exchange executive at Tullett Prebon, is the exchange's co-founder and CEO. Richard Schaeffer, the former chairman of the New York Mercantile Exchange (Nymex), is the chairman. Timothy Petrone, a member of Nymex and the Chicago Board of Trade; David Greenberg, a former Nymex board member; and James McNally, who has spent time as a member of Nymex, the Commodities Exchange and the Hong Kong Futures Exchange, are all also involved with Amercanex, according to the story.

Now, I think we're a long way away from seeing Goldman Sachs and Bank of America holding futures in Afghan Kush, Cinderella 99 or Critical Haze (all real names of different strands of marijuana listed on the exchange; go to Amercanex's homepage to see its ticker).

Still, there is no denying the potential. According to the fourth edition of "The State of Legal Marijuana Markets," produced by Arc View Market Research, a publisher of cannabis market information and analysis, and New Frontier, a data collection, analysis and reporting service in the cannabis industry, legal medical and adult use of marijuana sales, combined, is expected to have a compound annual growth rate of 30 percent from now until 2020. Sales in 2020 are projected to hit $21.8 billion.

Hurdles

These are numbers that are hard to ignore, and it makes sense that with that much money floating around, financial firms would want to get involved.

There are, however, some major hurdles for the industry to overcome, the biggest of which is the federal government. As it stands now, the use, sale and possession of marijuana is still illegal under federal law. For Amercanex, according to the Bloomberg story, buyers and sellers have to be in the same state. Also, all trades are physical purchases, meaning there are no paper-only futures or options contracts.

Obviously, that means the practicality of Amercanex catching on with big financial institutions at the moment is slim to none. However, as more states choose to legalize marijuana usage, even if just for medical purposes, the market could grow large enough where firms would no longer be able to ignore it.

From a technology perspective, as noted in the story, there an interesting wrinkle in this nascent marketplace: the variety of the product. From the story:

Weed comes in a very wide range of quality and potency and price; the legal stuff hasn't been around long enough for any national benchmarks. Traditional spot and futures markets for commodities like wheat or crude oil are linked to a single, widely accepted variety with a minimum quality standard.

Americanex currently examines everything sold on its exchange in a lab, but as the exchange grows it will be interesting to see what type of infrastructure can be put in place to analyze different strands and get that data out to buyers and sellers.

It is still early days in the space, so while the cannabis industry might not be a place for major firms to jump into immediately, it's certainly something they should keep their eyes on. Unlike the product, it doesn't seem to be going up in smoke anytime soon.

This week on the Waters Wavelength podcast ─Episode 7: Machine Learning, Climbing the Corporate Ladder

Anthony and I debate machine learning and its application to firms in financial services. We also touch on my opinion piece detailing the best way to climb the corporate ladder. We also chat about the fallout from Super Tuesday.

If you haven't already, subscribe to the podcast on iTunes here. Also, check out our SoundCloud account here


Food for Thought

  • All the features from our March issue are live. There's lots of information on some of the biggest topics in the industry. Be sure to check them all out. You can find the entire list here. 
  • I'll talk more about March Madness next week, since the bracket will have been released by then, but I'd like to give a quick shout out to Iona College men's basketball team, which won the Metro Atlantic Athletic Conference (MAAC) tournament on Monday, earning the conference's automatic bid into the NCAA tourney. Although I'm not an alumni, I did spend two seasons covering the team, and happened to be on hand in 2014 when the Gaels lost a heartbreaker to Manhattan in the conference championship game. Senior A.J. English has turned into a legitimate star that has the potential to make it to the NBA. With the way the NCAA regular season has played out, the possibilities of Iona at least making a little bit of noise is there.

Like the column? Hate the column? Let me know via email (da[email protected]) or Twitter (@dandefrancesco).

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