Does an electronic stock exchange need an upstairs market?

Hendrik Bessembinder, Kumar Venkataraman

Research output: Contribution to journalArticle

54 Citations (Scopus)

Abstract

We examine the Paris Bourse, whose electronic limit order market closely resembles the downstairs markets envisioned by theorists, to test several theoretical predictions regarding upstairs trading. We present direct evidence in support of the Grossman (J. Business (1992) 509) prediction that upstairs brokers lower execution costs by tapping into unexpressed liquidity, as actual execution costs upstairs are on average only 20% (35%) as large as they would be if block trades were executed against displayed (displayed and hidden) liquidity in the downstairs limit order book. Consistent with prior analyses, the Paris data also support the Seppi (J. Finance (1990) 73) hypothesis that upstairs brokers certify trades as uninformed. We also find that participants in stocks with less restrictive crossing rules agree to outside-the-quote executions for more difficult trades and at times when downstairs liquidity is lacking. These likely represent trades that could not have been otherwise completed, suggesting that market quality can be enhanced by allowing participants more flexibility to execute blocks at prices outside the quotes.

Original languageEnglish (US)
Pages (from-to)3-36
Number of pages34
JournalJournal of Financial Economics
Volume73
Issue number1
DOIs
StatePublished - Jul 2004
Externally publishedYes

Fingerprint

Liquidity
Stock exchange
Prediction
Broker
Execution costs
Limit order market
Market quality
Block trades
Finance
Limit order book

Keywords

  • Crossing rules
  • Electronic exchange
  • Limit order book
  • Upstairs market

ASJC Scopus subject areas

  • Accounting
  • Strategy and Management
  • Economics and Econometrics
  • Finance

Cite this

Does an electronic stock exchange need an upstairs market? / Bessembinder, Hendrik; Venkataraman, Kumar.

In: Journal of Financial Economics, Vol. 73, No. 1, 07.2004, p. 3-36.

Research output: Contribution to journalArticle

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