Trade Classification Algorithms for Electronic Communications Network Trades

Ellis, Michaely, and O'Hara (2000) find that trade classification rules have limited success in classifying trades executed inside the quotes. We reconfirm this result and propose an alternative algorithm to improve the classification accuracy for trades inside the quotes. This alternative algorithm improves the overall success rate for classifying trades, especially for trades that occur inside the quotes. Additionally, we show that the Lee and Ready (1991) and Ellis, Michaely, and O'Hara (2000) trade classification algorithms provide biased estimates of the actual effective spreads and price impacts, while our algorithm provides statistically unbiased estimates of actual effective spreads and price impacts