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GAMBLING ON MARIJUANA'S FUTURE

Pot Exchanges Are Popping Up Despite Federal Roadblocks

Legal marijuana is a $5 billion business in the United States, and Steve Janjic figured he'd get a piece of it.  With a commodity exchange.  For a product that can't be transported across state lines.

Not to worry.  "It's never easy to pioneer an industry," said Janjic, a former foreign exchange executive at Tullett Prebon who has put $1 million into Amercanex, an electronic cannabis-trading platform that handles sales of about 100 to 150 pounds of weed a week.

That's not exactly blockbuster in a country with an estimated 20 million marijuana consumers.  It may not be too bad, though, in the case of a young exchange for a psychoactive substance transitioning to legitimate, or sort of legitimate, considering it 's illegal under federal law.  Janjic and other Wall Street veterans backing Amercanex take the very long view.

While only four states and the District of Columbia have sanctioned pot for recreational use, Nevada may join them after a November vote.  The drug is allowed for medicinal purposes in 23 states.  Polls show a majority of Americans believe it should be as licit as beer, giving Amercanex high hopes.

"I look at this as an early Nymex," said Richard Schaeffer, a former chairman of the New York Mercantile Exchange.  "I look for this to become a very substantial matching engine bringing buyers and sellers together."

Schaeffer, 63, is Amercanex's chairman, and Janjic, 49, is CEO and co-founder.  Others from the financial world involved include futures trader Timothy Petrone, a member of Nymex and the Chicago Board of Trade, former Nymex board member David Greenberg and James McNally, who's been a member of Nymex, the Commodities Exchange and the Hong Kong Futures Exchange.

For the record, not one of them is a cannabis user, which is probably neither here nor there.  Even the gluten-intolerant can get rich in wheat futures.

But is there serious money to be made trading the flowers and leaves of the cannabis plant? Amercanex isn't alone in betting there will be, someday.  Sohum Shah, a 26-year-old with a degree from the University of Arizona, started the Cannabis Commodities Exchange three months before Amercanex got off the ground.

CCE operates only in Colorado, which in 2012 became the first state to vote to make recreational pot legal.  Amercanex is in Colorado and California, the first state to OK weed for medicinal use, and Janjic said there are expansion plans.  The hurdles are sizable.  For an exchange to fully function, a commodity has to have standardized specifications and some regulatory oversight, as products from corn to metals do, so everyone can be assured of exactly what they're buying and selling, said Dale Rosenthal, who teaches finance at the University of Illinois at Chicago.  "There's not a clear reference price" for raw marijuana either, he said, which is another sticking point.

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.

Amercanex buyers aren't operating blind, Janjic said, because the exchange sends what's sold on its platform to a laboratory for evaluation and shares the results.

But here's the rub: Buyers and sellers have to be in the same state.

The U.S.  government regulates interstate commerce, and both selling and possessing marijuana are federal crimes.  So, then, is sending it across borders - and Amercanex is an exchange for spot trades of physical purchases, not paper-only futures or options contracts.  Right now, federal law is "the risk in this game," Janjic said.

In Colorado, purveyors were required until January 2015 to cultivate what they sold, and most still do.  "The only way that I think you can really be successful is by growing your own," said Bruce Nassau, the CEO of Tru Cannabis, which has five stores.  "If you're buying from a wholesaler, you're screwed."

In Oregon and Alaska, merchants are allowed to use their own raw materials, but Washington, D.C., legalized in 2014 with a law forbidding retailers from doing so.  "In a system like that, exchanges become more useful," said Adam Orens, the founding partner of the Marijuana Policy Group.

Amercanex started in July 2014 with 20,000 seats, though it has retired about 8,000.  The seats began selling for $2,500 each and are now going for $10,000, Janjic said; 7,000 are still up for grabs.

Dixie Brands, a Denver-based maker of tetrahydrocannabinol-infused products, bought a seat last year and has an equity stake.  Amercanex will help distribute its goods more efficiently, said CEO Tripp Keber.  "You're starting to see some other players come into the market, which I think is a strong endorsement."

For McNally, who's on the three-member advisory board and owns a seat, being part of a brand-new sector is exciting.  "It reminds me of when I first started," he said, recalling his days as a Hang Seng index options trader in Hong Kong in the 1990s.  "It's really fun."

Last year, legal weed sales rose 17 percent to $5.4 billion, according to a report from ArcView Market Research and New Frontier, and if every state had legalized marijuana the sum could have been $36.8 billion.  California, the most populous state, might start boosting the numbers soon.

Campaigns are collecting signatures for November ballot measures.  "California is very important," Janjic said.  "It's shaping up to be the largest marketplace in the world."