“Trading Down” in the 2012 Draft

Unlike in the other sports, draft picks in Major League Baseball are not tradeable assets – teams are required to use the selections that are allocated to them, and they are not permitted to officially trade a player for the first 12 months after he signs a professional contract with them, though teams do occasionally use the PTBNL loophole to trade them in the 6-12 month window. So, in tonight’s draft, you won’t see any swapping of picks or deals being made. We know who is picking at what spot, and regardless of whether they’re happy with that position or not, it is set in stone and will not change.

However, the new rules governing team draft allocation pools may present the opportunity for teams to unofficially “trade down” in a way that has has been less practical in previous years.

First, a quick review of the new rules. Each pick of the first 10 rounds (338 picks in all) have been assigned a value based on the suggested signing bonus associated with a player chosen at that position. This isn’t new, as MLB has been “recommending” slot bonuses to teams for years. However, the CBA now gives the league some real authority to enforce these bonus recommendations, at least in the aggregate sense. The sum of a team’s pick values adds up to their overall draft bonus pool, and there are significant penalties in place for going above the amount that MLB suggests that a team spends to sign their selections.

Any team that exceeds the total bonus pool by any amount up to 5% will be taxed at 75 percent of the overage, so every dollar past the allocation limit is essentially $1.75 in actual cost. A team that goes beyond the 5% overage limit will also incur a loss of their first round selection in next year’s draft, and a team that spends more than 10% over their allocation is taxed at 100 percent of the overage and loses their first and second round selections in the following year’s draft. The loss of picks is a significant deterrent because the allocation pool is tied to where you select, so a team can’t simply forfeit a selection and then reallocate that money to sign over-slot guys with the selections they still have.

So, you’re probably not going to see any teams exceed the first penalty tier – they may be willing to pay an extra 75 cents on the dollar to complete negotiations and sign a guy they like, but the loss of draft picks beyond that limit makes it cost prohibitive to blow the recommendations out of the water. So, including the 5 percent overage, the bonus pools range from $12.9 million (Minnesota) to $1.7 million (Anaheim), and several teams that have been notorious for throwing big money at hard sign guys late in the first round have pretty limited budgets for this year’s draft – Detroit, for instance, has just $2.2 million to play with, while the Yankees are at $4.4 million.

So, in previous years, guys like Rick Porcello could make large bonus demands that pushed them out of the top 10, but a team with a lower selection in the first round could use their selection on the player and meet his pre-draft price in order to get him signed. Last year, for instance, the Nationals selected Brian Goodwin with the 34th pick in the draft, but signed him for $3 million – a price equivalent to what #8 pick Francisco Lindor received.

The new pool allocations make it extremely difficult for the teams with lower first round selections to make these kinds of selections, however, so guys who ask for significant bonuses but do not end up getting selected near the top of the first round could be in for a real slide. And this is where the teams at the top may find an opportunity to “trade down” this year.

The pool of talent at the top of this year’s draft is considered one of the weakest in recent history, and there’s not a lot separating the guys in the mix for the first half dozen selections or so, so there may be some temptation to take a lower value target with a top selection and redistribute that money to the team’s next selection in an attempt to grab a guy who slides for cost reasons.

The obvious example in this year’s draft is Luc Giolito, who was considered a potential #1 overall talent before elbow soreness derailed him for most of his senior season. Rather than undergo Tommy John surgery, Giolito has rested his arm and is still hoping to be a high selection, even though scouts haven’t seen him throw off a mound in months. Giolito was probably looking at a bonus in the $4-$7 million range before his injury, so even if he offers teams a discount based on the increased risk, he may still have a price floor of something like $3.5 million (keep in mind, this is speculation – I know nothing about Giolito’s actual signing price), which would make it a bit of a challenge for any team outside of the top 10 to fit him into their pool allocation.

There’s a legitimate chance that Giolito is in for a real freefall tonight. If the teams in the top 10 decide that they’d rather not take a risk on a guy with some medical red flags, teams in the 11-30 range may not see him as signable with the money they have available, and he could end up being available to teams who have already made one selection.

For a team with a high draft selection who doesn’t love the guys at their spot and who thinks that this scenario is plausible, this is where “trading down” becomes a possibility. Let’s just use the Pirates, for example – they have the #8 pick and the #45 pick, so their total pool allocation is $6.6 million, but they could go up to $6.9 million if they were willing to pay the overage tax. If they are interested in Giolito but don’t want to risk not being able to sign a first round talent by taking him at #8, they could work out a deal with a player who is likely a lower first round talent and offer him the slot bonus of a pick where they might expect to go. For instance, a player who believes he is going to get drafted in the 25-35 range will have an expected bonus of $1.4 to $1.7 million, so the Pirates could offer that prospect $1.5 million and the right to call himself a top 10 selection if he’ll agree to sign for well below the #8 slot recommendation.

Since slot for the #8 pick is $2.9 million, the Pirates would have just saved $1.4 million that could then be reallocated to the #45 pick, which comes with its own $1.1 million slot recommendation. Add in the approximately $300,000 worth of overage availability to the Pirates, and they could potentially offer Giolito $2.8 million to sign at #45 without incurring any loss of future picks.

Now, that’s still $700,000 below my totally made up price floor to get him to sign, so the Pirates would also likely have to go cheaper on some later picks as well. The slot bonuses for 103/136/166 total up to just over $1 million, so the team could save enough by taking easy sign guys in the 3rd-5th round in order to come up with enough money to get Giolito to sign at #45.

This strategy would essentially be the equivalent of trading picks 8/103/136/166 for something like 5/30 (so maybe we should call this trading up instead?), giving a team a chance to select two first round talents. It’s worth noting that the Pirates actually did something very similar to this in 2009 when they drafted Tony Sanchez at #4 overall, signing him for less than other players might have agreed to at that spot, and then gave $1M+ bonuses to 6th rounder Zack Von Rosenberg and 8th rounder Colton Cain, then tossed another $425K at 12th rounder Jeff Inman.

So, this wouldn’t be a completely new draft strategy, but the pool allocations now make it more likely that top talents slip past the end of the first round, and perhaps make this kind of trade-off more intriguing for a team that might not like their options in the top 10. Given that it’s a weak draft class, I’ll be interested to see if any team tries something like this tonight.