56 Pages Posted: 23 Jan 2012 Last revised: 16 May 2016
Date Written: March 1, 2015
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
Suggested Citation: Suggested Citation
Easley, David and Lopez de Prado, Marcos and O'Hara, Maureen, Discerning Information from Trade Data (March 1, 2015). Journal of Financial Economics, 120(2), pp. 269-286. May 2016; Johnson School Research Paper Series No. 8-2012. Available at SSRN: https://ssrn.com/abstract=1989555 or http://dx.doi.org/10.2139/ssrn.1989555