Trading and liquidity

Every time there is some activity in the football transfer market, you are likely to hear one of two things. Either a particular player was “a steal” or the buyer “overpaid”. You seldom hear that a player was bought or sold at a “fair price”. What drives this?

Note that the issue is not perception – if you look at the transfer dealings, you are likely to find that the general opinion of whether the transfer fee was too high or too low is in most cases fairly accurate. Even if it is not accurate at the time of the transfer, it gets borne out in the subsequent year or two after sale.

Two weeks back I took a class in introductory economics for a bunch of people who hope to get elected to the Bangalore Municipal Council (BBMP). Teaching them about demand and supply, and trade, I mentioned that in any voluntary trade, both the buyer and the seller are “winners”. For example, if Liverpool sold Fernando Torres to Chelsea for GBP 50 million, it means two things: One, the value that Liverpool placed on the future contribution of Torres to the club was less than GBP 50 million. Two, the value that Chelsea placed on the future contribution of Torres was more than GBP 50 million. If either of the above conditions were not true, the deal would not have happened.

So why is it that football transfers usually end up costing too much or too little? The answer lies in “liquidity”. Liquidity is a concept that is normally used in financial markets as a measure of the depth of the market. It measures how many people are willing to buy and sell a particular commodity at a particular point in time. The theory is that the greater the number of buyers and sellers for a particular commodity, the better is the price discovery. I’ve said this several times before – it is unfortunate that the concept of liquidity doesn’t find as much traction in mainstream economics literature.

Coming back to football – why is it that players are typically either undervalued or over valued? Because players are unique, and that makes the market illiquid. Let us go back to the deal that took Torres to Chelsea. Let us say that the value Chelsea placed on his future services was GBP 50 million, and the value that Liverpool placed on his future services was GBP 35 million (numbers pulled out of thin air). Given that Liverpool owned him, this deal could have taken place at any value between these two numbers (note that at any price between 35 and 50 million, both Liverpool and Chelsea would be willing to trade)! So why did the deal take place at one end of the spectrum?

It was a consequence of how badly the two clubs wanted to do the deal. While Torres had lost form and hadn’t been performing in the 2010-11 season, Liverpool were quite happy holding on to him – they were not desperate to do the deal. Even when offered an amount higher than their valuation of the player, they sensed Chelsea’s desperation in doing the deal. So Liverpool’s game here was to hold on long enough until they knew Chelsea had bid an amount they were unlikely to improve on, and then they sold.

Sometimes fans like to sing something like “there is only one Fernando Torres” (typically when he scores). And that is the precise reason that Liverpool was able to get a premium on his sale. There was a certain kind of player whom Chelsea desperately wanted to buy, and Torres was the one who fit the bill perfectly. Given the lack of comparables, and the desperation of the buyer, it became a seller’s market and Liverpool were able to profit from it.

So we have seen here that when the buyer is more desperate to do the deal than the seller, the deal takes place at the higher end of the “value spectrum” (I just made up that phrase at this moment). It can go the other way also. When Liverpool sold Torres, they (rather unwisely) invested most of it buying a player called Andy Carroll from Newcastle United. Carroll turned out to be a dud – he was increasingly injury prone, and when a new manager Brendan Rodgers came in, he found him to be not suitable for the style of football Liverpool wanted to play.

The presence of Carroll in the squad, however, would put pressure on the manager to play him – largely a consequence of the fee that had been paid to purchase him. To this end, Rodgers decided that it was better to cut his losses and remove Carroll from the squad, rather than play a suboptimal brand of football just so that Carroll was played. Rodgers correctly decided that the money that had been spent in buying Carroll was a “sunk cost”.

Now, in his year and a half since his arrival at Liverpool, Carroll had done much to convince people that he was overvalued. His injuries and lack of form meant that clubs were unwilling to value him highly, and given Liverpool’s determination to sell, it was a seller’s market. The GBP 15 million that Liverpool extracted from West Ham for the sale was perhaps exactly the value that Liverpool had placed on Carroll.

To summarize – you sell if the price is higher than your valuation. You buy if the price is lower than your valuation. The buyer’s and seller’s valuations together determine the “value spectrum” along which a sale can be done. Presence of comparable commodities means that people can go for substitutes, and so that shrinks the value spectrum. In case of footballers with few comparables, there are no factors compressing the value spectrum, and the full extent of it is available.

In a large number of cases, one of the buyer and seller is much more desperate to do a particular deal than the other. And that pushes the price of the deal to one of the edges of the value spectrum. Hence people end up either significantly underpaying or significantly overpaying for footballers.

Big forward, little forward

When most teams play a front two, it comprises of a small quick guy (called the Number Ten) and a big guy (called the Number Nine). The convention is that when the team is defending, one of these two stays up ahead (just beating the off-side mark, wherever the opposition defence line is), while the other tracks back in order to help out with the defence. The worldwide convention in this regard is for the Number Nine to stay up front in anticipation of an attack while the Number Ten drops back to defend.

Liverpool, of late, however, have played differently. Their Number Ten (figuratively, since he wears seven on his back) Luis Suarez is the one usually left alone upfront when the team is defending, while the number Nine Andy Carroll tracks back to help out in defence.

The logic of this policy is two-fold. One, an additional big player coming back to defend means greater ability to win defensive headers within the box (think of it in terms of winning rebounds in basketball). Secondly, Liverpool under Dalglish have preferred a pass-the-ball-out-of-defence method rather than clearances. This means that when the offence breaks and a counterattack is to be launched, the ball is more likely to be played along the ground to the forward rather than up in the air. And Suarez is the more likely of the pair of forwards more likely to make use of that.

So what is the concept behind the conventional wisdom of leaving Nine upfront with Ten dropping back into defence? The typical strategy in English football is to clear the ball out of defence rather than passing it out, and the big number nine is well positioned to receive it upfront. The big nines usually also have the ability to ‘hold up’ the ball, to allow his team-mates to join him. The number ten, being quick, is able to quickly join the number nine in attack.

The other factor behind leaving the number nine upfront is that they are usually one-dimensional players, with the only abilities being to win headers and hold up the ball. They are either no good in defence, or have big strikers’ egos that prevents from joining defence effectively. Number tens, on the other hand are more skilled all-round and are more likely to come of use in defence.

In this sense, Carroll is not bad at defence, and more importantly he is young and out of form, which makes it easy for Dalglish to force him to track back while defending. So far, it seems to be working.

Library Membership

While on a long lonely walk today (ironically, immediately after watching Liverpool play) I saw this library not too far from my house. It was called Just Books, I think, but I’m not sure of the name. With my British Council Library membership due for renewal in a couple of months, and doubts about whether I want to renew it (the library is too far, and I’ve stopped getting excited by the collection there), I’m considering membership to this library.

I took a look at the books today, and there were two major turnoffs. One was a section labeled “non-fiction” (whatever that is supposed to mean!). I don’t remember the other one right now – but I do remember having one other turn off while I was there. Apart from that, though, the collection seems good, which makes me think I should take membership there.

I found a lot of books there that I’ve read, or want to read, but wouldn’t borrow because I already own them. Now, I don’t know how to interpret this. The positive way of looking at it is that given that I like a lot of books that are there, they’re more likely to get other books of “my kind”, too. The negative way of looking at it is that I already own all the interesting books there that I want to read, so the membership wouldn’t add much value to me. The clincher, I guess, is about the frequency with which they update their collection. If they are going to buy new books on a regular basis, then I guess this will work out for me.

The other thing I liked about the library is that it has multiple copies of a lot of books. I think that is always a good thing, for you wouldn’t want to wait forever for someone to read that book that you want to read. They follow the netflix pricing model, where you pay a fixed fee (Rs 150) per month and there are no late fees. So by taking longer with a book, you are essentially denying yourself bang for the buck that you’re going to be paying them regularly (In the past I’ve “bailed out” of a library membership that followed this model. I didn’t go for a while, and then realized that the amount due was so high that I didn’t mind losing the deposit I’d placed there and I never bothered returning the books I’d “borrowed” from there).

And do any of you use Justbooks already? Do you like it? What are the odds that you go to the library and find nothing that you want to read?

Why is Ten Sports sitting on so many rights?

I wanted to stay up last night. I wanted to stay up and watch the WI-Eng match till the very end. Waking up this morning and checking the scorecard, it seems like it was a really good match. And Fidel Edwards seems to have become a last-day-shutdown specialist. This is the second time this series he’s hung on. And he’d done so once before against India at ARG.

There was another reason I wanted to stay up last night. I wanted to watch Liverpool play Real Madrid. I woke up this morning and saw that it was an amazing game, too. Looking through the Guardian Football site (btw, Advani seems to be advertising heavily on that site; it’s a pity he never advertises here on my site) I noticed that Chelski-Juve was also a strong game, despite the result. Another reason I would’ve wanted to stay up last night. For the record, I slept at 12:10. Tea-time in the Test match, and before either of the football games had started.

Ten Sports seems to have bitten off more than it can chew. It seems to own the rights to telecast too many different things. I think I have raised this point once earlier, but it pzzles me as to what Ten Sports is trying to achieve by getting rights to telecast so many things, most of which are happening at the same time. For example, over the last couple of weeks I’ve been unable to watch the first hour of WI-Eng even if I’d wanted to, because it was overlapping with the last hour of SA-Aus, which was being telecast at the same time.

The reason I slept off early last night was because I didn’t have the option to watch what I wanted. All the three games that I’d’ve been reasonably interested in were supposed to be on Ten Sports (Zee Sports doesn’t count since Tata Sky doesn’t offer that), and I¬† realized that I’d be forced to watch what the guys at the Taj Entertainment Network would want me to watch. Denied the option to choose what I wanted to watch, I went to bed.

It puzzles me that Ten Sports isn’t subletting its contracts. Devoid of anything decent to show, I suppose that ESPN or NEO would’ve only been too happy to acquire the rights to telecast last night’s Liv-Real game by paying a fee to Ten Sports. And it would’ve unlocked value at the hands of the remote-holder. Ten Sports need not let go of the rights to show all the games. All they need to do is to sell the “out of money options” – the rights to the game which they won’t be able to telecast anyway.

Now, the problem will be if accounting for all costs, no options are out of money. For example, you know you won’t be able to show Liv-Real. But you think that the loss of brand equity of your channel would exceed the money you’d gain by selling this option to another willing channel. The viewers are the only losers at this game, but I don’t know what can be done. After all, viewers¬† are way too dispersed in order for them to take any kind of action.

Extending this question, what can a sports body do to prevent a bidder from acquiring rights to telecast and then mess up the telecast (or not telecast it at all) ? After all, the sports body is out there to make as much money as possible from the TV rights, and they need to ensure significant investment into broadcasting by the broadcasters, so the “i’ll give rights to only those channels that are in the interest of the people” model won’t work.

One option would be to sell the rights to two channels in each market. But given that broadcast is a natural monopoly, the sports body will not be able to make as much by selling to two bidders as it can by selling to one bidder. Is there any other solution that you can think of? If yes, unleash.