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This article develops a model of the upstairs market where order size, beliefs, and prices are determined endogenously. We test the model's predictions using unique data for 5,625 equity trades during the period 1985 to 1992 that are known to be upstairs transactions and are identified as either buyer or seller initiated. We find that price movements prior to the trade date are significantly positively related to trade size, consistent with information leakage as the block is "shopped" upstairs. Further, the temporary price impact or liquidity effect is a concave function of order size, which may result from upstairs intermediation.

Policymakers in emerging markets are increasingly concerned about the consequences for the domestic equity market when companies list stock abroad. We show that the effects of cross-listing depend on the quality of intermarket information linkages. We investigate these issues with unique data from the Mexican equity market. The impact of cross-listing is complex-balancing the costs of order f low migration against the benefits of increased intermarket competition. These effects are exacerbated by equity investment barriers that induce segmentation of the domestic equity market. Consequently, the benefits and costs of cross-listing are not evenly spread over all classes of shareholders. THERE HAS BEEN A DRAMATIC INCREASE in the trading of foreign stocks as investors recognize the need for international diversification and as foreign companies seek to broaden their shareholder base and raise capital. As a result, the number of American Depository Receipt~ADR! listings on U.S. exchanges has also risen sharply. Though corporations view cross-listings as value enhancing, the changes in liquidity and volatility, and the cost of trading associated with order f low migration following cross-listing may adversely affect the quality of the domestic equity market. Such changes are especially important for emerging markets facing new competition from wellestablished, highly liquid markets abroad, and are the source of increasing concern among policymakers. There is also considerable academic interest in this topic, especially because the effects of cross-listing may be related to the * Domowitz is from Northwestern University, Glen is with the International Finance Corporation, and Madhavan is at the University of Southern California. Financial support from the World Bank is gratefully acknowledged. Expert research assistance and several helpful suggestions were provided by Mark Coppejans. We thank

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JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Wiley and American Finance Association are collaborating with JSTOR to digitize, preserve and extend access ABSTRACT This paper analyzes price formation under two trading mechanisms: a continuous quote-driven system where dealers post prices before order submission and an order-driven system where traders submit orders before prices are determined. The order-driven system operates either as a continuous auction, with immediate order execution, or as a periodic auction, where orders are stored for simultaneous execution. With free entry into market making, the continuous systems are equivalent. While a periodic auction offers greater price efficiency and can function where continuous mechanisms fail, traders must sacrifice continuity and bear higher information costs. THERE IS A REMARKABLE diversity in the method by which trading is accomplished around the world and across assets. For example, a trader on theInternational Stock Exchange (London) can obtain price quotations before trading, and order execution at those prices is generally assured. By contrast, some stocks on smaller European exchanges can be traded only once a day and orders must be irrevocably submitted before prices are determined. Yet, we know little about how differences in trading designs affect price formation. This paper examines and contrasts the process of price formation under different forms of market organization when information is imperfect and traders act strategically. Understanding the relationship between trading structures and price behavior is important for theoretical and applied reasons. From a theoretical viewpoint, the extensive literature on rational expectations suggests that prices efficiently aggregate information when trading is organized as an auction with large numbers of traders. Yet, most securities markets in theFrom the University of Pennsylvania. This paper is based on Chapter II of my dissertation from Cornell University. I thank A bayesian model of intraday specialist pricing, Journal of Financial Economics, 30, 99-134. McInish, T. and R. Wood, 1988, An analysis of intraday patterns in bid/ask spreads for NYSE stocks, Working paper, University of Texas. Mendelson, Haim, 1982, Market behavior in a clearing house, Econometrica, 50, 1505-1524. , 1987, Consolidation, fragmentation, and market performance, Journal of Financial and Quantitative Analysis, 22, 189-207. Pithyachariyakul, Pipit, 1986, Exchange markets: a welfare comparison of market maker and walrasian systems, Quarterly Journal of Economics, 101, 69-84. Seppi, Duane, 1990, Equilibrium block trading and asymmetric information, Journal of Finance, 45, 73-94. Stoll, Hans, 1989, Inferring the components of the bid-ask spread...

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Actual investment performance reflects the underlying strategy of the portfolio manager and the execution costs incurred in realizing those objectives. Execution costs, especially in illiquid markets, can dramatically reduce the notional return to an investment strategy. This paper examines the interactions between cost, liquidity and volatility, and analyses their determinants using panel data for 42 countries from September 1996 to December 1998. We document wide variation in trading costs across countries; emerging markets, in particular, have significantly higher trading costs even after correcting for factors such as market capitalization Goldman Sachs Asset Management provided many useful comments. Any errors are entirely our own. and volatility. We analyse the inter-relationships between turnover, equity trading costs and volatility, and investigate the impact of these variables on equity returns. In particular, we show that increased volatility, acting through costs, reduces a portfolio's expected return. However, higher volatility reduces turnover also, mitigating the actual impact of higher costs on returns. Further, turnover is inversely related to trading costs, providing a possible explanation for the increase in turnover in recent years. The results demonstrate that the composition of global efficient portfolios can change dramatically when cost and turnover are taken into account.