Confessions of a market skeptic

Originally, I had intended to write this column in the offseason because it’s more of a musing than an advice column, but since I think that I’m much better at waxing philosophic than offering advice anyway, maybe my silence on the latter is the best I can give and a blessing in disguise.

I have something of an internal inconsistency, a philosophical chasm in the way I view fantasy baseball’s market and financial markets as they apply to my conception of the rest of the word and my overarching economic beliefs. This gulf prompts me to ask a question, the answer to which has the potential to be profoundly troubling to my view of self.

I have no intention of turning this post into a debate of political or economic philosophies, but this conundrum does rest a bit on my views, so let me just get through this very briefly— one sentence even. In economic matters, especially those that deal with the types of complex financial instruments that have such a potentially profound impact on the world’s economy, I’m extremely pro-regulation and unconflicted about my willingness to step on a corporation’s alleged right to make money to protect the masses from potential disaster. While you may be tempted to debate the merits of that philosophy, that is not the point of this post, so let’s not focus on that aspect of this post.

The point of this piece is that my feelings about fantasy baseball are 180 degrees opposite my macroeconomic leanings. In the fantasy baseball marketplace, I almost always prefer the deregulation. I don’t mind if there is no veto structure at all in a league, as long as participants are vetted to some very minor degree. I’m a proponent of the creation of more, and increasingly complex instruments to expand on the possible market transactions in the fantasy baseball universe. Seriously, has nobody at Yahoo proposed the idea of making it possible to propose three-team trades?

If we put aside the obvious differences between Mike Stanton hype and a housing bubble, such as the fact that there are no meaningfully harmful consequences that can result from the collapse of a fantasy baseball league, there’s one key difference that between the two that I’d like to discuss, as I don’t think most fantasy players think enough about it when evaluating the market transactions of others. Let’s begin with an anecdote.

About two weeks ago, in a 12-team mixed league in which I’m a co-owner, a trade ran across the board that sparked the ire of many a team. The trade was Dustin Pedroia for Leo Nunez and Brandon League. Obviously, this was before the news that David Aardsma may have Tommy John surgery in his future, though in the League-acquiring owner’s defense of the move, to his credit, he did speculate that he doubted Aardsma would be back and healthy, and presumed that given League’s performance, the job would actually be his all year.

The message board raged. The league called for a discussion regarding the possibility of instituting a veto system for trades— in its eighth year, there is none, except in a case in which one owner has what he feels to be evidence of collusion. At first look, I grumbled at the trade too, but upon giving it a little thought, I was fine with it, and not just on the philosophic grounds that an owner should be allowed free rein to act in any manner as long as he legitimately thinks such actions are toward the benefit of his team. No, there’s another dynamic at work here: the imperfect and inefficient trade market in fantasy baseball.

This owner needed saves. He was languishing in last place in the category. He had no closers at all, and therefore needed to acquire at least two to hope to be competitive in the category; adding one would have been of little to no value in terms of actual points to be accrued. Right there, the likelihood that he’s going to get near “equal value” for Pedroia is essentially low, if he wants to fill his needs swiftly and in one transaction. Think about how imperfect the market is for what he seeks – he needs to find a single owner who wants a middle infield stud (who is off to a slow start), and who is willing to part with two closers. Who has two closers to trade at once (and this league loves closers too, let me tell ya)? Basically, this owner is forced to take any option on the table that gives him the kinds of pieces he wants; there aren’t going to be many offers from which to choose.

So, he looked at his team, decided which players he owned had enough value to command multiple closers, picked the one for whom he had the best contingency plan according to his estimation and announced, “it’s closing time, ladies, and I’m willing to go home with any two of you, sight unseen, but it has to be a ménage de trois!” What other option did he have?

The idea that this owner could have gotten “fair value” for Pedroia exists only in a vacuum; that is, it exists only if you presume that the form in which the return value comes does not matter to him. Given his situation, clearly it did. One could argue that he should have made these moves step-wise, get one closer and another more valuable asset, then acquire closer No. 2 in a subsequent deal. However, trades aren’t so easy to make, and doing so would take time and effort, which are resources in their own right. He wanted to fill his need quickly and was willing to take a bit of a discount to do so—an entirely rational perspective. He’s further vindicated in that the League half of the equation looks like it will play out in accordance with his prediction, which was ridiculed by many I might add.

So, getting back to the philosophical debate, the point is that if the league were to regulate his actions ex post facto, he would have essentially been handcuffed. It’s reasonable to suggest that no similarly structured offers were on the table, so precluding his ability to make the move he did make would have been tantamount to preclude his right to make any similar move; a clear overreach. For the record, in this situation the commissioner rightly stepped in and announced that this trade would not be vetoed and that the (no-) veto policy was not up for review. Strong, decisive, and in my opinion, correct behavior. Props to you, sir.

The imperfections and inefficiencies of the market (it’s also really a pain to compare offers to make sure you get the best trade, etc.; it’s not like there’s open bidding) regulate the market substantially in the first place, effectively speaking. To then regulate the market after transactions have taken place, and effort had been made to traverse said market inefficiencies, seems excessive—again, provided everybody in the league can be trusted to play without training wheels.

Further, the introduction of a somewhat complex instrument to expand the transaction potential of the market, such as a three-way trade feature, would have increased the efficiency of this transaction and opened new options to the Pedroia dealer that didn’t previously exist. It’s my opinion that for him to have been able to markedly better in this (type of) deal, he would have had to get a third team involved. In fact, if he had been able to do that, I think he probably could have gotten a very nice deal done.

In the Wall Street market, where people and machines trade commodities, futures, and derivatives, the market is theoretically nearly perfect (wait, don’t go to the comment section to disagree yet, I’ll get to what I mean by that). Complex computer systems exist to shave pennies off of prices. So much attention is paid to detail that when the value of something shifts by a penny, warehouses of computers enact prop trades en masse to capitalize on the efficiency, and for those who run these outfits, the pursuit of faster internet connections to get to the “front of the line” when executing these trades is a virtual (no pun intended) arms race.

When I say the markets are perfect, I mean that anything you can possibly want, you can get. There’s a well-established market for it, and the price you pay for something is precise, even if not always commensurate with its true value.

Now, when we talk of complex financial instruments, it is my belief that, contrary to the proposition of their existence in fantasy baseball, many of them exist primarily to deceive and obfuscate the essential currency of the marketplace, value, risk, etc. Again, this is just my interpretation.

Pretty is What Changes

by Steven Goldman

Take notice, baseball. Few things endure just as they've always been, casual pursuits least of all.

All of this is to say that in the real world, not only are the consequences of failure ever more dire, the need to expand the latitude of what market actors can do is non-existent. The character of these new expansions seems disproportionately skewed toward those who turn the market from a way to more efficiently distribute capital to promote widespread economic growth to a big casino with lots of new games with rules that the pit bosses (and gaming commission) don’t even understand.

Another item worth noting here is that the form of currency is quite precise in a real market, but much less so in terms of fantasy baseball. This is an imperfection, though an inescapable reality, that makes the trade market difficult. If we have a potential trade, and I’m off on my side by 8 percent, unless I have a player who is exactly 8 percent more valuable than the guy I’m slated to include, it is very difficult to reconcile this difference. “You don’t have change for a Jimmy Rollins?” “No, sorry, all I have is this Ryan Braun and I don’t want to break it.”

The way I reconcile my differing opinions hinges on the relative market imperfections and inefficiencies of the fantasy baseball aftermarket. I believe the de facto regulation imposed by that dynamic is substantial enough that additional regulation is not needed. What is needed, however—in both systems—are firm and well thought out parameters regarding the types of behavior that are and are not permissible.

But, there is another possibility here, the one that forces me question myself. I make no bones about my socialist-leaning political tendencies and because of them I don’t really participate in the investment market, even though I feel understand it better than the vast many who do. Perhaps my desire to regulate it is a much more selfish decision… I do participate in fantasy baseball, and I’m pretty good at it, if I do say so myself.

Could it be that I am really no different than the hot-shot trader who doesn’t want regulation because it will hamper his ability to personally thrive, even though such regulation may offer greater protection to the mass? The typical argument against regulation in financial markets is usually that those involved are smart and sophisticated and that we shouldn’t infringe on their ability to exercise those smarts in creative ways. Well, when thinking about how I’d like to be treated in the context of my fantasy leagues and my latitude to make moves and implement unconventional and perhaps excessively risky strategies, I’d say that sentiment applies.

I like to think my conviction is real, and the proof is that despite having an active interest in understanding how the economy works and even how people make fortunes off ruining the economic futures of others, I’ve never been tempted exploit any of that knowledge for my own financial gain. I’ve deemed that game something I’m not interested in playing. So, maybe actions speak louder than words and ultimately, I’m voting via my participation, because when it comes to fantasy baseball, I emphatically say, “Play Ball!”