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| Author: | Ellis, K. Michaely, R. O'Hara, M. |
| Title: | The Accuracy of Trade Classification Rules: Evidence from NASDAQ |
| Journal: | Journal of Financial and Quantitative Analysis
2000 : DEC, VOL. 35:4, p. 529-552 |
| Index terms: | TRADE FINANCE FINANCIAL MARKETS |
| Language: | eng |
| Abstract: | Researchers are increasingly using data from the NASDAQ market to examine pricing behavior, market design, and other microstructure phenomena. The validity of any study that classifies trades as buys or sells depends on the accuracy of the classification method. Using a NASDAQ proprietary data set that identifies trade direction, the authors examine the validity of several trade classification algorithms. The authors find that the quote rule, the tick rule, and the Lee and Ready (1991) rule correctly classify 76.4%, 77.66%, and 81.05% of the trades, respectively. The authors also find that extant algorithms do a mediocre job when used for calculating effective spreads. For NASDAQ trades, the authors propose a new and simple classification algorithm that improves over extant algorithms. |
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