What is 'Upstairs Trade'

An upstairs trade is a buy or sell transaction for an exchange-listed stock that is not executed through an exchange. The upstairs trade is executed with different terms and pricing than would be available through the exchange. The negotiations for these deals are done in secret, behind the scenes, and are often considered “off the record.”

Some exchanges do not allow upstairs trading. The trade does not occur on the trading floor but in a separate location.

BREAKING DOWN 'Upstairs Trade'

An upstairs trade typically involves large companies or institutions. Upstairs trades are often done to provide anonymity to the parties involved. These types of trades are typically large transactions that may be kept off the floor to avoid large price impacts or front running. The seller in particular may want to avoid lowering the value of the stock or destabilizing the market, because they want to preserve their ability to get a good price if they want to sell more shares of the stock in the future.

Upstairs trades and dark pools

The term dark pools has in many circles replaced the term “upstairs trading” and the two are often used interchangeably. Dark pools are another type of trading environment that lives off the public exchange. It is a venue in which buyers and sellers can negotiate in private, without their activities broadcast to the general public. This activity is mostly conducted via brokerages. Even though the trading takes place off the major exchanges, this doesn’t mean it is an anything goes atmosphere. Activity in dark pools is still regulated, and the brokers and traders involved must be registered with the appropriate financial regulatory entities. This helps prevent any of the parties involved from being exploited or deceived.

Upstairs trading, along with trading by dark pools and market makers, is a type of off-board trading.  This type of trading gets its name from the fact that the New York Stock Exchange is nicknamed “the big board,” so activity that takes place away from that and similar exchanges would be considered off-board. Off-board trading often takes place on the over-the-counter  market, but these trades can also involve a direct transaction between the buyer and seller.

Some in the financial community criticize off-board trading for allegedly depressing a security's public price as available through an exchange. This activity also keeps the average investor in the dark to a large extent about the true value of that particular stock.

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