“The only thing to bridge the gap [in player value] is draft picks and to me, they’re like cigarettes in prison... That’s the only currency you have. The value changes up and down all the time and it makes for a not very liquid market."
This quote from the 2018 Sloan Conference1 illustrates a key problem with draft picks as a means of exchange: they are illiquid.
This interested me given in theory a draft asset can be valued anywhere from near nothing (e.g. a top-55 protected 2nd round swap) to highly valuable (e.g. several unprotected first round pick from a team projected to be one of the worst in the league), and almost everywhere in between.
This piece is an exploration of creative ways to structure deals involving draft picks to make them more liquid; that is, filling in the "everything in between" studio space a bit more. The inspiration for the title is the arbitrarily complex set of derivative financial assets that financial engineers have created, called Exotic Derivatives, to fuel the Wall Street casino. It is a work in progress.
The Constraints
According to the CBA Bible2, the following constraints (non-exhaustive, ignores the matching salary and player components) must be satisfied in any draft pick trades:
- "Seven Year Rule" - draft picks more than 7 years in the future can't be traded.
- No more than 55 picks in a single draft can be protected.
- "Stepien Rule" - A team may not trade away all first round draft picks in consecutive years. However, they may trade away their own (or another team's) so long as they are in possession of at least 1 unprotected draft pick in that window.
- Teams can add protections to picks it acquires only if they received the pick in an unprotected form.
- One-time options to defer the conveyance of a pick for 1 year can be added to unprotected picks.
These rule-based constraints along with several practical constraints surrounding team-building make draft pick trades that are both mutually palatable and allowable for all parties tough to come by. What follows is a description issues that get in the way of deal-making and and potential creative alternatives, from relatively tame to wacky. We will use the logic from Programmatic Draft Valuation to approximate the value of draft assets.
(As a caveat I'm not sure if all of these are all legal with certainty, just that if they were they would be interesting.)
Creative Pick Concepts
Specific Pick Protections on Swaps
The Stepien Rule applies to any chance that a team won't have a first-round picks in consecutive years. This means that the downside to constructs like multi-year pick protections is that they hamper the ability for a team to trade picks in any subsequent year surrounding the years to which the protections apply.
It is well-known that swaps are a way to get around the Stepien Rule issue. A lot of the trades involving multiple swaps are specifically designed to get around the Stepien Rule for teams that have traded out all their first round picks, for example Phoenix trading swaps for Beal after giving up most of their tradeable draft picks for KD. Even when it's not born out of necessity though, swaps can be a way to increase the liquidity of draft picks.
For example, consider the Kings draft asset that they sent Atlanta in the Kevin Huerter deal: protected 1-14 in 2024, 1-12 in 2025, 1-10 in 2026, and 2026 + 2027 2nds if not conveyed by then. Our basic model estimates that at the time of the trade, with the Kings coming off a season finishing 24th in the standings, using Pelton's 9-year surplus estimates, this asset is worth roughly 20.8 units (20.8% as valuable as the #1 overall pick). Here is the probability distribution of the various conveyances:
And what the distribution of picks this will end up being looks like:
However, this trade effectively prevents the Kings from trading any first round pick from 2023 to 2027 to avoid breaking the Stepien Rule, even if it is unlikely to last till 2027.
Instead, we can replicate the exact same expected value payoff with a 2024 right to swap that is protected for picks 1 and 4 (but not 2 and 3) turning into the 2026 and 2027 2nds if not conveyed, which comes out to worth exactly 20.8 in utility as well while maintaining the flexibility to trade any first round picks in the 2023-2027 window.
Note that odds of converting the 2nd or 3rd overall pick is elevated relative to the other draft picks, because if the Kings do land one of those picks they are almost certainly going to swap it with Atlanta, but a lot of the time end up just sending over a second round pick or a late first instead. This is a feature, not a bug.
There is nothing forcing us to protect within a continuous range: we can protect specific picks. In particular for picks 1-4, because every team in the lottery has a specified percentage chance of landing one of those picks, thinking carefully about which of them to protect can allow us to more accurately replicate the desired payoff.
Specific pick protections can also take advantage of a rare win-win scenario: a focused rebuilding team like OKC may have too many young prospects to roster, forcing them to make difficult roster crunch decisions and aggressively bundle picks to trade up in the draft, while a contending team trading them the pick likely doesn't want to tie up their draft pick flexibility for too many years into the future. Instead of receiving a multi-year protected pick, OKC can opt to receive the pick say if and only if it lands at pick number 2 or 3. This significantly reduces the probability they have to add another young prospect, but conditional on conveying, it is likely to be a very good one that they'd be more than happy to open up a roster spot for.
Further, we can use different draft pick values depending on the objective of the franchise - a team with a long time-horizon might opt for Pelton's 9-year surplus approach, a team that is more focused on the near-term might opt for a 3 or 4-year surplus approach, and a team that only values future championship odds might optimize for All-NBA probability.
Using Draft Protections Predictively
Standings and draft pick numbers by extension are fairly predictive one year out but not predictive more than a few years out4.
An aggressive team can use this predictive power, and lack thereof, to their advantage.
Suppose a team has agreed to send over an unprotected first round pick several years out. As a recipient team we want receive that pick in a year where the team is likely to be bad, but we have very little ability to predict which year that would be the case. If right now is 2023, we know very little about what the distribution of a team's 2026 pick will look like. But the 2026 pick tells us a lot about about what 2027 will look like.
A draft asset structured as follows could be interesting:
- 2026 1st: conveys if it's exactly pick number 15
- If it lands 1-14, turns into 2027 unprotected 1st
- If it lands 16-30, turns into 2030 unprotected 1st
The 2026 1st is essentially a dummy asset with almost no chance of conveying because it needs to be exactly pick 15. But what it does tell us is that we want next year's draft asset if it's a lottery pick, because that means the team is likely to be bad next year as well. If it's not a lottery pick, we want the pick 4 years out, because that means the team is likely to be good next year as well, while 4 years out we revert to base rates.
This is a creative (unsure if legal?) way to maximize the odds that the unprotected pick we receive comes at a time when the team is more likely to be bad, and hence land a high draft pick.
Protect Early, Swap Middle, Send Late (PSS)
One issue with draft swaps is they often involve a contending team giving a rebuilding team the right to swap, which either becomes non-exercisable or less valuable if both teams mean revert to similar standings. For example, Zach Kram3 found that only 3 of 31 times, a swap gave a team the equivalent of a top-20 pick or better in value delta:
There are a few challenges to creating a mutually palatable swap deal:
- A team giving up a swap wants to be protected in the event that they receive one of the top picks.
- Swaps of mid to late draft picks have very little value.
- A recipient team probabilistically isn't going to be able to exercise a swap if they're bad.
One way to thread the needle here is the Protect Early, Swap Middle, Send Late (PSS) construction: protected 1-4, turns into a swap from 5-15, and is sent as a straight up pick if 15-30.
We can think of this as reverse protecting the delta of a swap. Even if the recipient team ends up being able to swap with a late pick, this swap will be worth very little, so receiving the pick outright ensures they're getting non-negligible value. Swaps become interesting if say a team can move up from the 20's to a pick in the 5-15 range. But protecting the 1-4 range ensures that the team giving up the swap is protected from the downside of the swap.
- https://www.youtube.com/watch?v=jL2ZSMQOOS4&t=431s↩
- http://www.cbafaq.com/salarycap.htm#Q89. Please let me know if any other constraints are missing; "Unlike most aspects of basketball operations, most specific trade rules are not found in the league’s collective bargaining agreement"3↩
- https://www.theringer.com/nba/2019/6/27/18760309/nba-title-windows↩
- https://www.theringer.com/nba/2022/10/12/23399637/nba-draft-swap-picks↩