Sunday, December 12, 2010

Time to End the Restriction on Trading Draft Picks


Baseball unlike just about every other major sport doesn't allow draft picks to be traded. It to me doesn't make a whole lot of sense.

I understand that some people don't like it, that they feel it would be unfair and that teams would be taken advantage of or do things that are unwise.

It seems to me that it would create a new layer of strategy, it would allow more flexibility. Brain Sabean famously once said that draft picks are unimportant. After the Giants signed Michael Tucker in 2003 they gave up the 22nd pick, the same happened in 2004 and 2005.

If teams really have no need for their draft picks why not let them trade them?

One of the arguments against it is wealthy teams would simply start buying draft picks. I really doubt that there is that much of a risk of this happening. The number of draft picks that turn into good players is relatively small and if the wealthy teams had to pay a high price to acquire this talent it would take a toll on them over time.

How Often Do Draft Picks Turn into Productive Players?

Martin Lee author of Obbseive Giants Compulsive did a study and found that getting a "star" player in the first 10 picks is only 11.5% and drops rather quickly after the first 10 picks. For rounds 11-20 it is 6.2% for rounds 21-60 a staggering 1.9%.

The odds of getting an above average player is better but still not a sure thing. Rounds 1-5 gets you an above average player 43.1% of the time. Rounds 6-20 gets you an above average player 18.5% of the time. Rounds 21-30 gets you an above average player 10.8% of the time. Anything later then that and it really falls off.

Useful players are more plentiful but still not overflowing. The odds of getting a player who is at least useful breaks down like this. Rounds 1-5 gets you a useful player 73.8% of the time. Rounds 6-20 gets you a useful  player 42.1% of the time. Rounds 21-30 gets you a useful player 31.5% of the time. In this group you find much more talent later in the draft, a useful player can be found in rounds 31-50 21.9% of the time, in rounds 51-90 12.9% of the time.

How Much Value Does a Draft Pick Produce?

So next we would have to come to some sort of valuation for each of these players. A star player lets say averages 5 WAR for the 6 seasons that he is under club control. At today's marginal wins value that puts a value of  $135 million. An above average player lets say averages 3 WAR over 6 seasons that is worth $81 million. A useful player averages 1.5 WAR over the six years that values him at  $40.5 million.

With the current structure a player plays for a around league minimum for their first 3 years and then have arbitration for the next 3. In the arbitration the generally get 30% of their value in year one, 60% in year 2 and 80% in year 3. So the team has to pay more as a player gets older. In addition there is also the bonuses paid to these players when they sign. These factors lower the amount teams are willing to pay for a draft pick.

So for out star player he has value to the team of $135 million and receives compensation of around $39.5 million plus lets say a bonus of $3 million if he were a first round pick for a grand total of $42.5 million. The team still cleans up with excess value of $92.5 million. The above average and useful player check out with excess value of $53.85 million and $25.05 million each.

How Much for That Draft Pick?

So what does that mean a team would be willing to pay for a top 5 pick? If you use the expected values and discount the future value for how long it will take to reach the majors and produce value a draft pick would come out to a maximum willingness to pay of $24.38 million. This is definitely on the high end of the scale as not every player is able to stay in the majors for six years but it gives us a good start for a back of the envelope type of calculation.

For draft picks later the price would be much lower. For example a pick in the middle of the first round is worth about $12 million dollars and for a late first round pick it is worth about $7.72 million. Going into the second round costs even less only $4.7 million.

So for the cost of buying a lottery ticket you could instead use that money to go after a much more sure thing in a major leaguer who has already made it. A early first rounder is worth approximately 5 wins a mid first rounder 2.5 wins and a late first rounder about a win and a half.

Conclusions

Draft picks have a lot of value but the value falls exponentially as you move further down in the draft. Draft picks like every transaction in baseball is accompanied by risk, free agents, prospects, trades and international signings all carry some risk that the deal will not pan out. Draft picks and similarly international signings carry the most risk that players will not pan out making them more like lottery tickets then anything else.

With one of the first picks in the draft the chance of landing a star impact player is small, with a free agent or going after a player in a trade a GM has at least a baseline of major league experience to project future performance from with draft picks you have much less reliable college and high school numbers plus what your scouts tell you.

It doesn't make a whole lot of sense to me why teams can not trade the picks away. Right now you have these assets that are sitting there for some teams, where it is nice to get a chance to play the lottery but it is not what every team wants or needs to do.

Personally I think that it would make more sense for the smaller and mid-market teams that are a couple players away but need a little more cash in the budget to go after a player that sell their draft picks or trade them away.

I do not put much stock into the argument that some teams would simply trade draft picks and then pocket the cash. General Managers and Owners generally want their teams to succeed and do try to win games. Even the worst run franchises make attempts to rebuild and win games as can be seen in the accumulation of prospects, free agent acquisitions and firings of coaches and general managers.

Giving the option of selling or trading draft picks allows for more flexibility to general managers and flexibility for teams that are not sitting on mounds of cash is an important thing.

If you built through the draft have a core of young cheap players and need to add one or two more impact players giving up draft picks that won't yield players for a few season if it all makes perfect sense. This to me adds very important flexibility and allows for GM's to get more creative in how they build their team. There is no one size fits all approach to building a team.

It is time for the end of the restriction on draft picks.


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