Discerning Information from Trade Data

Abstract

How best to discern trading intentions from market data? We examine the accuracy of three methods for classifying trade data: bulk volume classification (BVC), Tick Rule and Aggregated Tick Rule. We develop a Bayesian model of inferring information from trade executions, and show the conditions in which tick rules or bulk volume classification will predominate.

Empirically, we find that Tick rule approaches and BVC are relatively good classifiers of the aggressor side of trading, but bulk volume classifications are better linked to proxies of information-based trading. Thus, BVC would appear to be a useful tool for discerning trading intentions from market data.

Keywords: Trade Classification, Bulk Volume Classification, flow toxicity, volume imbalance, market microstructure

JEL Classification: C02, D52, D53, G14