Upstairs Market

Key takeaways

• The upstairs market is a private network where large institutional investors and brokerage firms execute big block trades off exchanges.
• Trades are carried out away from public order books—often electronically or by phone—reducing visible price impact.
• Intermediaries and alternative trading systems (including dark pools) help execute large orders but raise transparency concerns that regulators monitor.
• The downstairs market refers to public stock exchanges where smaller, visible trades provide liquidity.

What the upstairs market is

The upstairs market describes private trading networks used by institutional investors (mutual funds, pension funds, banks, insurance companies, hedge funds) and large broker-dealers to execute large-volume or block orders. Instead of routing these orders through public exchanges, participants negotiate and execute trades directly with one another or via intermediaries. Because the transactions are not displayed on public order books, they are not visible to retail investors.

How it works

• Trading desks at large firms coordinate block trades off the exchange, typically by phone or electronic message.
• Professional brokers or counterparties match buy and sell interests and arrange execution to avoid disrupting public market prices.
• Many upstairs trades occur in alternative trading systems (ATS) or dark pools—private venues that allow large trades without pre-trade public disclosure.

The private routing and use of intermediaries aim to minimize market impact (large visible sell or buy orders that could move prices) and reduce the risk of front-running—when someone trades ahead of a client order based on foreknowledge.

Advantages

• Reduced market impact: Executing large orders privately helps prevent signaling that could drive prices unfavorably before a trade completes.
• Lower transaction costs: Dealing with a small number of institutional counterparties can reduce aggregate commissions and fees versus executing many smaller trades on public exchanges.
• Feasibility of complex strategies: Program trades and coordinated executions that require simultaneous or staged transactions are often easier to arrange off-exchange through experienced intermediaries.

Risks and regulatory concerns

• Transparency: Because upstairs trades are not immediately visible on public exchanges, critics argue they can undermine price discovery and fairness for retail investors.
• Oversight of dark pools and ATS: Regulators have taken steps to increase reporting and monitoring. For example, FINRA has pushed for greater publication of ATS trading data, and some countries have tightened rules limiting upstairs transactions.
• Market share and scrutiny: In the past, a significant share of trading activity has occurred off-exchange (e.g., roughly 15% of U.S. trading in 2014), prompting ongoing regulatory attention to ensure market integrity.

Alternative trading systems allow off-exchange trading but do not impose the same on‑floor rules as public exchanges, which is why regulators closely monitor them.

Upstairs vs. downstairs market

Participants: Upstairs — institutional investors and large broker-dealers; Downstairs — retail investors, market makers, and public exchange traders.
Visibility: Upstairs — private, off-book; Downstairs — public order books with transparent prices and volumes.
Trade size: Upstairs — large block or program trades; Downstairs — smaller, individual trades.
Price discovery: Downstairs trading contributes directly to publicly visible price formation; upstairs trading can minimize immediate market impact but reduces pre-trade transparency.

Conclusion

The upstairs market is an important part of modern equity trading, enabling large institutions to execute sizable orders with less market disruption and potentially lower costs. Its private nature, however, raises legitimate transparency and fairness concerns, so regulators continue to balance the needs of large institutional trading with protections for broader market integrity.