Are Upstairs Markets Pareto Improving?

43 Pages Posted: 23 Jul 2003

See all articles by Peter L. Swan

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Kingsley Y. L. Fong

University of New South Wales - School of Banking and Finance; Financial Research Network (FIRN)

Ananth Madhavan

BlackRock, Inc.

Date Written: June 30, 2003

Abstract

We examine the price impact cost of block trades across three trading mechanisms: the upstairs market, a crossing network system, and the limit order book. While, unsurprisingly, both the upstairs market and crossing system provide lower price impact costs for block trades than downstairs, using unique exogenous measures of market access we find no evidence that competition from these external markets has an adverse affect. Thus, despite the threat that they drain liquidity and cream-skim to harm the main market, these alternative trading mechanisms appear from our evidence to be Pareto improving for all investor classes and market participants regardless of which market is the major focus.

Keywords: Fragmentation, upstairs trading, crossing networks, liquidity, cream skimming

JEL Classification: G14

Suggested Citation

Swan, Peter Lawrence and Fong, Kingsley Y. L. and Madhavan, Ananth, Are Upstairs Markets Pareto Improving? (June 30, 2003). EFA 2003 Annual Conference Paper No. 751. Available at SSRN: https://ssrn.com/abstract=424983 or http://dx.doi.org/10.2139/ssrn.424983

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Kingsley Y. L. Fong

University of New South Wales - School of Banking and Finance ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Ananth Madhavan

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

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