Upstairs, Downstairs: Electronic vs. Open Outcry Exchanges
41 Pages Posted: 7 Aug 2003
Date Written: February 20, 2003
Computerized trading has made great inroads in equity and derivatives markets, especially in Europe and Asia, but open outcry markets remain dominant in the United States despite predictions of the imminent demise of floor trading. This article identifes three factors that influence the relative liquidity of computerized and open outcry markets: the sizes of upstairs and downstairs liquidity pools, the magnitude of the risk that upstairs traders face in being "picked off" when trading via limit order in an open outcry market, and the quality of information available to floor and upstairs traders. Although liquidity differences certainly influence the choice of trading technology, network effects and coordination costs may allow the less liquid trading method to prevail. In the presence of coordination costs, the existence of mechanisms for coordinating the trading choices of investors and hedgers, agency costs, and the organization and governance structures of exchanges also influence whether open outcry or computerized trading will dominate.
Keywords: Securities market structure, financial exchanges
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