Why Automated Trading Venues need Upstairs Markets

The paper presents new evidence on the contribution to price discovery of the upstairs market. The ‘component share’ and ‘information share’ measures are used, supplemented by the probability of informed trading (PIN) analysis. Most discovery arises downstairs, consistent with previous findings. But the upstairs market makes a non-negligible contribution, which approaches that of the downstairs market at the start and close of the day. The PIN estimates indicate that a higher proportion of upstairs than downstairs trades are informed. The upstairs has a larger role in price discovery than previous evidence suggests.