Market Microstructure.

• Position: Bureau News

The NBER's Working Group on Market Microstructure met in Cambridge on November 30. Organizers Bruce Lehmann, NBER and University of California at San Diego; Andrew W Lo, NBER and MIT; Matthew Spiegel, Yale University; and Avanidhar Subrabmanyam, University of California at Los Angeles, chose these papers for discussion:

Hendrik Bessembinder, University of Utah, and Kumar Venkataraman, Southern Methodist University, "Does an Electronic Stock Exchange Need an Upstairs Market?"

Discussant: Elizabeth OddersWhite, University of Wisconsin, Madison

Tim Bollerslev, NBER and Duke University, and Hao Zhou, Federal Reserve Board, "Order Flow, Market Risk, and Daily Stock Returns"

Discussant: S. Viswanathan, Duke University

Gunter Strobi, University of Pennsylvania, "On the Optimal Allocation of New Security Listings to Specialists"

Discussant: Kathleen Hagerty, Northwestern University

Joel Hasbrouck and Gideon Saar, New York University, "Limit Orders and Volatility in a Hybrid Market: The Island ECN"

Discussant: B. Swaminathan, Cornell University

Tarun Chordia, Emory University, "Liquidity and Returns: The Impact of Inclusion into the S&P 500 Index"

Discussant: Amber Anand, Syracuse University

Bessembinder and Venkataraman investigate the costs and benefits of using an "upstairs" market, in which trades are facilitated through search and negotiation, to execute large equity transactions. The Base de Donnees de Marche (BDM) database from the Paris Bourse identifies upstairs-facilitated trades and trades in the "downstairs" (electronic limit order) market. Using data on 92,170 block transactions in a broad cross-section of firms from the Paris Bourse, the authors test several theoretical predictions about upstairs trading and investigate the effect of market structure on trading costs. They find that the upstairs market at the Paris Bourse is an important source of liquidity for large transactions. These results support the hypothesis that the role of an upstairs broker is to lower the risk of adverse selection in the upstairs market by certifying a block order as being uninformed. In addition, for the subset of stocks with less restrictive crossing rules (eligible stocks), the authors find that a v ery high proportion of the upstairs trades are executed at prices near the quotes. These results suggest that market participants closely monitor the liquidity in the downstairs markets, and the right to execute away from the quotes is used only sparingly...