Upstairs Market for Principal and Agency Trades: Analysis of Adverse Information and Price Effects

@inproceedings{Smith2001UpstairsMF,
  title={Upstairs Market for Principal and Agency Trades: Analysis of Adverse Information and Price Effects},
  author={Brian F. Smith and D. Alasdair S. Turnbull and Robert W. White},
  year={2001}
}
This paper directly tests the hypothesis that upstairs intermediation lowers adverse selection cost. We find upstairs market makers effectively screen out information-motivated orders and execute large liquidity-motivated orders at a lower cost than the downstairs market. Upstairs markets do not cannibalize or free ride off the downstairs market. In one-quarter of the trades, the upstairs market offers price improvement over the limit orders available in the consolidated limit order book… CONTINUE READING

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