Upstairs Market

What Is an Upstairs Market?

The term upstairs market alludes to a network that exists between large firms and institutional investors. This network includes large trades or block orders. Trades in these transactions are not submitted through a stock exchange, and that means they are not noticeable to other market participants. These orders are carried out straightforwardly among purchasers and sellers, with professional brokers going about as intermediaries. The size of the order made in the upstairs market accounts for a big portion of the market's trading volume.

Seeing Upstairs Markets

Upstairs markets include networks of trading desks that conduct large volumes of trades. These trades are many times called upstairs trades. As a result of the sheer volume included, these trades are typically finished by institutional investors, for example, mutual funds, banks, pension funds, insurance companies, and brokerage companies.

As indicated over, these trades occur off the trading floor and are regularly done electronically or via telephone. How these upstairs trades are conducted means there are no large swings or disturbances to securities prices in the market.

Directing trades through professional intermediaries (for example away from the eyes of retail investors) can assist with forestalling activities like front-running or trading that happens an inside by a broker data that will influence the price of a stock. Front-running may negatively impact the price or execution of a trade.

Special Considerations

These markets are at times depicted as dark pools, thus the phrase "dark pools of liquidity". Dark pools are financial exchanges, networks, or gatherings where the trading activity happens, and are organized privately between the gatherings in question. Dark pools, similar to upstairs markets, permit investors to make large trades without unveiling the subtleties publicly. Despite the fact that they might appear to be obscure, dark pools — and upstairs trades — they are totally legal.

This doesn't mean that regulators aren't paying consideration. Starting around 2014, trades executed in the upstairs market addressed 15% of all trading activity in the United States, and there's a generally excellent probability that that figure keeps on developing.

A few specialists keep on addressing whether the practice subverts the transparency and openness of financial markets for retail investors. leading to stricter rules which assist with cutting down on dark pool trading. For example:

• Canada presented regulations in October 2012 that placed stricter limits on the conditions under which upstairs market transactions can happen
• Australian regulators presented comparable limitations in May 2013, which caused the volume of upstairs-market transactions to decline essentially in the two nations

Regulators in the United States are likewise addressing whether this method of trading harms retail investors and sabotages trading activity, and have found a way a ways to make the market fair for all participants. For example, the Financial Industry Regulatory Authority (FINRA) presented an initiative that requires the week by week publication of trades that happen on a alternative trading system (ATS). It was approved by the U.S. Securities and Exchange Commission (SEC) in 2014.

Alternative trading systems permit trading activity to happen off exchanges and don't authorize rules about the conduct of participants, which is the reason regulators keep an eye on them.

Upstairs Market versus Downstairs Market

In the event that there's an upstairs market, there will undoubtedly be a downstairs market, right? The response is yes. Since the upstairs market is a (private) network including institutional investors, brokerage firms, and intermediaries, it's safe to expect that the downstairs markets are stock exchanges.

Downstairs markets, or stock exchanges, make liquidity in the market with trades that are executed by small investors, market makers, and traders who are on the floor. Dissimilar to the upstairs market, which includes large trading volumes, trades that are conducted in the downstairs market are typically smaller. Trade subtleties are additionally accessible, including prices and the amount of stock traded.

Benefits of an Upstairs Market

If a hedge fund wishes to empty its position in a security and submits a large sell order to the stock exchange as needs be, that sell order might be deciphered by other market participants as a bearish signal on that specific security. This, thus, may lead different investors to bid down the price of the security, causing the hedge fund to get a less ideal sale price.

The upstairs market can likewise be beneficial for institutional investors due to the diminished transaction fees. Via carrying out a large block order with just one or a small number of institutional counterparties, the organizations included could pay substantially lower overall commissions or different fees as compared to trading with a lot larger number of smaller partners.

Now and again, for example, while executing program trades that require several transactions to be executed at the same time, involving professional intermediaries in the upstairs market may as a matter of fact be the best way to carry out the strategy really.

Highlights

• The upstairs market is a network including large firms and institutional investors.
• Intermediaries are much of the time engaged with the upstairs market, which forestalls insider trading.
• The upstairs market is something contrary to the downstairs market or stock exchanges.
• This market includes large blocks or high volumes of trade, which are made off the trading floor.
• Regulators monitor the effects of trading in the upstairs market on retail investors.