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This paper directly tests the hypothesis that upstairs intermediation lowers adverse selection cost. We f ind upstairs market makers effectively screen out information-motivated orders and execute large liquidity-motivated orders at a lower cost than the downstairs market. Upstairs markets do not cannibalize or free ride off the downstairs market. In one-quarter of the trades, the upstairs market offers price improvement over the limit orders available in the consolidated limit order book. Trades are more likely to be executed upstairs at times when liquidity is lower in the downstairs market. THIS PAPER EXAMINES THE EXTENT to which upstairs market makers, who know the identity of parties submitting orders, route orders based on perceived information content. The paper also investigates whether the upstairs market cannibalizes or free rides off the downstairs market.The recent explosive growth of Electronic Communications Networks~ECNs! and other anonymous order entry systems, such as Island and Instinet, raises the question of the role and importance of an upstairs market. As discussed in Harris~1993!, off-market activities potentially impose a number of externalities on public exchanges. These can make it difficult to enforce secondary precedence rules. For example, in the downstairs market, orders are generally matched first on the basis of price and second on the basis of time of arrival. However, as orders received in the upstairs market do not have to be submitted immediately to the downstairs market, they may be matched in the upstairs market ahead of any equally priced orders in the downstairs market.On the other hand, Burdett and O'Hara~1987! and Seppi~1990! suggest that the upstairs markets are a response to the needs of clients who wish to transact a large block of shares but do not want their full orders revealed to