Evaluating Trade Classification Algorithms: Bulk Volume Classification versus the Tick Rule and the Lee-Ready Algorithm

59 Pages Posted: 30 Nov 2012 Last revised: 17 Jun 2015

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business

Roberto Pascual

Universidad de las Islas Baleares

Andriy Shkilko

Wilfrid Laurier University - Lazaridis School of Business and Economics

Date Written: September 1, 2014

Abstract

We compare the accuracy of the Bulk Volume classification (BVC) to that of the conventional rules: the tick rule (TR) and the Lee-Ready algorithm (LR) for a large sample of equities. TR and LR produce significantly better classifications than does BVC. This result applies to stocks of all sizes, including the most frequently traded. Iteratively optimizing BVC improves its performance, but the conventional rules continue to outperform. TR and LR produce more accurate estimates of VPIN; order imbalances computed using TR and LR are comparable to those computed using BVC in explaining returns, liquidity, and trading costs.

Keywords: trade classification, bulk volume classification, tick rule, Lee and Ready, VPIN

JEL Classification: G10

Suggested Citation

Chakrabarty, Bidisha and Pascual Gascó, Roberto and Shkilko, Andriy, Evaluating Trade Classification Algorithms: Bulk Volume Classification versus the Tick Rule and the Lee-Ready Algorithm (September 1, 2014). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2182819 or http://dx.doi.org/10.2139/ssrn.2182819

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO MO 63108-3397
United States
3149773607 (Phone)
3149771479 (Fax)

HOME PAGE: http://business.slu.edu/departments/finance/faculty-staff/bidisha-chakrabarty

Roberto Pascual Gascó

Universidad de las Islas Baleares ( email )

Ctra. de Valldemossa km 7,5
Departamento de Economia y Empresa
Palma, Baleares
Spain
+34 971 17 13 29 (Phone)
+34 971 17 23 89 (Fax)

Andriy Shkilko (Contact Author)

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

LH 4050
75 University Ave. W.
Waterloo, Ontario N2L3C5
Canada
519.884.0710 ext. 2462 (Phone)
519.884.0201 (Fax)

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